Year-on-year inflation hit 10.1% in September, harking back to 40-year-old levels. But I remember those dark days from four decades ago. And since then, UK shares have stormed way ahead of inflation. So what would I do today?
There are several approaches that I reckon could help with the inflationary pain of the next 12 months. I’ve picked one UK share for each.
Dividend yield
Seeking high dividends is one way. If inflation climbs reaches 10%, then adding 10% in dividend cash to our pot seems like a good choice.
I’d go for Persimmon (LSE: PSN) to try to achieve that. It’s hard to guess what the full-year dividend will be, but forecasts currently put it at around 18%. That’s come about due to a hefty share price fall.
If the housing market slumps, housebuilder shares could fall further and dividends could be cut. But I rate the sector as a relatively safe one for long-term investors, even if we suffer short-term volatility.
Others I’d consider for one-year high dividends include Rio Tinto (10.5%) and M&G (10.8%), bearing in mind the risk that these are only forecasts and could change for the worse.
Essentials
Investing in essential goods or services is also, I think, a good way to help offset inflation. I’m thinking of National Grid (LSE: NG), which is on a forecast dividend yield of 5.7%.
That’s not enough to beat double-digit inflation in just one year, but it’s a start. More importantly, it’s a company that provides an essential service. I know we’re in the middle of an energy crisis, and people will be cutting back on usage. But it’s not something like holidays, or fashion accessories, which people can simply stop buying during tough times.
The National Grid share price has fallen in the past few months, and it looks good value to me.
Alternative choices for essentials include Tesco (5.7% forecast dividend) and United Utilities (5.2%).
Progressive
Investing in shares usually wins out over inflation not in one year, but over time. If a company pays only modest dividends, but keeps them growing progressively, it can come out well ahead. The dividend only needs to beat long-term average inflation, not each individual year’s.
I’d also go for an investment trust. Specifically, one of the the Dividend Heroes (as selected by the Association of Investment Companies) which have raised their dividends for at least 20 years in a row.
My choice is City of London Investment Trust (LSE: CTY), whose dividend has risen for 56 straight years. Currently its dividend looks set to yield 5.2%.
Alternatives include Merchants Trust (40 years, 5.4%) and Murray Income (49 years, 4.8%)
Bottom line
There’s a key risk with relying on dividends to help with inflation. They might be cut, or annual rises might be reduced. And that could affect share prices. We need to consider these risks when we invest.
But for me, the bottom line in trying to keep my investments ahead of inflation is straightforward. If I don’t plan to sell my shares this year, then the purchasing power of my cash doesn’t matter right now. All that matters is that I beat inflation in the long run, over the years I intend to keep investing.