[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Prudential

What it does: Prudential is a life insurance and asset management company operating solely in Asia and Africa.

By Andrew Mackie: Following the spin-off of its UK and US businesses, Prudential (LSE: PRU) is now focused entirely on some of the world’s fastest growing markets. This makes complete sense when one considers its growth drivers. Across Asia, for example, despite rising levels of prosperity, insurance penetration is still extremely low. This market is estimated to be worth $1.8trn.

What I particularly like about Prudential is that it is diversified across geography, channel and product. Not only does this provide it with multiple sources of growth but also adds resilience to its business performance. Its distribution network encompasses over 500,000 licensed agents as well as through partnerships with banks (known as bancassurance).

Prudential’s share price has come under severe pressure throughout 2022. It is down 30% year to date. This has been primarily driven by the ongoing closure of the border between Hong Kong and Mainland China. This has hit revenues in its largest market. However, when one considers the explosive growth potential across several of the regions it operates in, today’s depressed share price offers investors an attractive entry point.

Andrew Mackie owns shares in Prudential.

Games Workshop

What it does: Games Workshop designs, manufactures, and sells fantasy miniatures for its Warhammer tabletop gaming experience.

By Zaven Boyrazian. Games Workshop (LSE:GAW) is arguably one of the world’s most recognised tabletop gaming companies. This is the group behind the immensely popular Warhammer franchises, generating the bulk of its revenue through selling miniatures to hobbyists through its global network of retail partners.

Over the last 12 months, the share price hasn’t been the best performer, dropping by over 40%. It seems investors are growing increasingly pessimistic about the short-term performance of this consumer discretionary business. And the latest trading update did show some shrinkage in profits, as consumer spending takes a hit from the cost-of-living crisis.

However, this drag on earnings ultimately stems from a short-term problem. And with the group’s long-term strategy still intact, backed up by an impressive cash war chest of £71m, I can’t help but see the recent share-price drop as a buying opportunity for my portfolio.

Zaven Boyrazian does not own shares in Games Workshop.

Smurfit Kappa Group 

What it does: Smurfit Kappa manufactures packaging products for e-tailers, supermarkets, consumers and industrial customers. 

By Royston Wild. A slew of positive trading updates from the packaging sector would encourage me to buy Smurfit Kappa Group (LSE: SKG) shares for November. 

The FTSE 100 business released financials of its own on Wednesday, 2 November. I think this could help it to record further healthy share-price gains across the month, and beyond. 

Industry rival Mondi reported a 55% rise in underlying EBITDA in the third quarter, it reported in October. It commented that “higher average selling prices and overall volume growth more than offset significant cost pressures.” 

Shortly before this, DS Smith announced that it expected “very strong” revenues growth in the six months to October. Trading was so strong in fact that the firm lifted its half-year profits forecasts. 

Smurfit Kappa’s cheap share price certainly leaves scope for fresh gains if its own financials impress. The packaging powerhouse trades on a forward price-to-earnings (P/E) ratio of just 7 times. 

Royston Wild own shares in DS Smith. 

AstraZeneca

What it does: AstraZeneca is a biopharmaceutical company that develops medicines used by millions of patients worldwide.

By Charlie Carman. AstraZeneca (LSE: AZN) has been a top FTSE 100 performer for a decade. An anticipated return to pre-Covid levels of cancer diagnostics should boost sales for the healthcare heavyweight’s range of oncology products, including Tagrisso, Lynparza, and Imfinzi.

Indeed, AstraZeneca is well positioned for an ongoing transformation in global demographics. Demand for pharmaceuticals to treat chronic diseases continues to rise, and the World Health Organisation predicts one in six people will be aged over 60 by 2030.

Disappointingly, the business suffered a recent setback in a trial for a nasal spray version of its Covid-19 vaccine. Initial testing revealed it didn’t provide adequate protection in humans. However, there’s more to the company’s drugs portfolio than coronavirus treatments, and I think growth prospects look bright elsewhere.

AstraZeneca’s share price has fallen nearly 15% since reaching a 52-week high in August. I believe this presents an attractive buying opportunity to increase the position in my shares.

Charlie Carman owns shares in AstraZeneca. 

Persimmon

What it does: Persimmon builds houses. And when prices are right, it builds up its land bank to build even more houses on.

By Alan Oscroft. The long-term argument for investing in Persimmon (LSE: PSN) is, I think, straightforward. The UK is in the grip of a chronic housing shortage. And our listed housebuilders enjoy strong barriers to entry.

The short-term argument against buying now is the economy, and the growing fears of house price weakness. After all, the Persimmon share price has fallen 50% over the past 12 months, and we don’t want any of that, do we?

Well, actually, I remember the previous housebuilder slump, and I noticed Persimmon was buying up building land when it was cheap. And after that, the shares entered a long and strong bull run. So what’s happening now? Persimmon has been buying up land again.

But the bottom line for me is a P/E ratio of only about five, and a 19% forecast dividend yield. The short-term risks are real, but I think Persimmon is oversold.

Alan Oscroft owns Persimmon shares.

Renishaw

What it does: Renishaw designs and manufactures high-precision measuring equipment and healthcare technology.

By Stephen Wright. I’ve gone for FTSE 250 stock Renishaw (LSE:RSW) as my best British shares to buy in November. This is a business that’s growing, is well protected, and has a strong balance sheet.

Renishaw makes specialist equipment, which it sells to various end markets, including agriculture, healthcare, and power generation. The company has over 1,800 patents protecting its products. 

The company’s balance sheet also looks sound to me. Renishaw has £16.25m in total debt and £141m in cash, which means that I don’t think it’s in much danger with interest rates rising.

Earnings have been growing at an average of 6% annually over the last decade. But the stock has fallen by almost 30% since the start of the year and is now trading at a P/E ratio of 21. 

Stephen Wright does not own shares in Renishaw.

Taylor Wimpey

What it does: Taylor Wimpey is one of the UK’s largest housebuilders, selling homes to private customers and local housing associations

By Paul Summers. The share prices of UK housebuilders have come under serious pressure in 2022 over concerns that rapidly rising interest rates and a protracted recession will dampen demand. Taylor Wimpey (LSE: TW) has been one of the biggest casualties, losing half its value since the beginning of the year.

This may be an opportunity for long-term-focused Fools like me. The FTSE 100 firm is clearly in far better financial health than it was during the Great Financial Crisis. And while dividends can’t be guaranteed, the 10% yield also looks more secure than the payouts on offer from Taylor Wimpey’s rivals. 

CEO Jennie Daly’s comments on the company’s outlook will be closely scrutinised when it releases a trading update early in November. With a P/E of just five, however, I suspect a lot of fear is already priced in. 

Paul Summers has no position in Taylor Wimpey.

Legal & General

What it does: Legal & General is a British multinational company that provides insurance, savings and investment products.

By Nathan Marks. I’m looking to Legal & General (LSE:LGEN) for my top British shares to buy for November. As one of the UK’s largest pension funds, it’s been grappling with the recent chaos in the bond market.

The Bank of England took emergency intervention in early October. That was to mitigate a material risk to the financial stability of the types of services that Legal & General provides. However, the company said that this episode had a “limited economic impact” on its businesses and still expected a full-year operating profit of 8%.

Market volatility could still worsen, causing further uncertainty in the company’s balance sheet and liquidity. However, the stock looks great all-round value and I think it’s been oversold. Today it trades at a P/E ratio of 6.8 and yields a very attractive 8.2% dividend.

It’s hard for me to ignore this strong business with historically robust demand for its products and services.

Nathan Marks has no position in Legal & General.

International Airlines Group

What it does: International Airlines Group is an Anglo-Spanish multinational group that is host to renowned airlines such as British Airways, Iberia, Aer Lingus, Level, and Vueling.

By John Choong. Despite a potential recession on the cards, travel demand still remains robust. As such, I think International Airlines Group (LSE:IAG) shares look lucrative at their current price.

In its most recent trading update, the firm disclosed that demand for travel remains strong and is still recovering to 2019 levels. There also seems to be an uptick in business and upper-class travel, which was echoed by its American competitors. CEOs are of the opinion that consumers are still spending despite inflationary pressures, just less on goods but more on services. Therefore, IAG is expected to benefit as the holiday season approaches.

Nonetheless, it’s worth noting that IAG’s high debt-to-equity ratio (107%) isn’t ideal in a high interest rate environment, and is something investors should definitely take note of. The group will have to hope that its free cash flow continues to remain robust through an economic slowdown in the medium term, or risks damaging its bottom line and sending its share price back down.

John Choong has no position in IAG.

Right now is certainly an interesting time to be investing in income stocks. That’s because dividend yields, on the whole, are getting larger.

Some companies, including those explored below, are coming off the back of strong years, but there are concerns about the macroeconomic environment in the coming months.

So, with dividend payments remaining constant or rising and share prices falling, yields have risen. However, big yields can be a warning sign. So, can these stocks maintain their big yields or should I stay clear?

The biggest yield on the FTSE 100

Persimmon (LSE:PSN) has the highest dividend yield on the FTSE 100 — around 20%. That means it would only take five years to get my investment back assuming the dividend yield remained the same in the coming years.

But there are some dark clouds surrounding the housebuilding sector. Interest rates are rising and prices appear to have peaked. This isn’t positive when cost inflation is running at 5%.

However, I feel that these issues are more than priced in. In fact, Persimmon is trading near its lowest point in eight years despite having a stellar 2021 and H1 of 2022. And long-term demand for housing in the UK is likely to remain strong. After all, there is an acute shortage.

There’s also the matter of the fire safety pledge. While some housebuilders are losing a year’s worth of profits to recladding houses, Persimmon’s spend is only equivalent to 10% of 2021 income.

I already own Persimmon stock, and it hasn’t been good to me, but trading below 1,300p, I’d buy more. The dividend forecast for 2023 is 225p, down only 10p from 2022. But even if the dividend were halved, I still see this as a good return and far above the index average.

A big yielding bank

A 7% yield might sound small compared to Persimmon, but it’s still an excellent return on my investment. Close Brothers Group (LSE:CBG) provides securities trading, lending, deposit-taking, and wealth-management services. 

The FTSE 250 firm is currently trading at its lowest point in nearly 10 years. However, the firm has strong margins — around 7.8% — and as noted by RBC, has defensive qualities. And with interest rates rising, you’d expect the bank to be able to expand margins further, but that can work two ways.

Naturally, a deep recession and much higher interest rates may dampen demand for its services. And that wouldn’t be good for business. However, hopefully, especially with a more fiscally responsible prime minister at the helm, we can expect less turmoil.

Once again, I already own Close Brothers Group shares. But as the shares are trading under 1,000p for the first time in nine years, I’d buy more today.

I think selecting dividend stocks from the FTSE 100 is a good idea as dollar-denominated stocks are costly right now. Of course, if the pound never recovers against the greenback, I might regret having focused on the UK stock market.

But I’ve found the two stocks on the FTSE 100 with the highest forward dividend yields. How confident am I that these juicy payouts are sustainable?

Safe as houses?

Persimmon (LSE:PSN), a housebuilder headquartered in York, pays the highest forward dividend yield on the FTSE 100 at 19.3%. In its half-year results for 2022, the company boasted of “strong demand” in the sector, with 6,652 new homes completed in the six months to 30 June.

But is the company a reliable dividend payer?

Leafing through Persimmon’s historical dividend payouts, I find that from 2016 to 2022 the dividend has been consistent and growing, from 110p to 235p.

It was a similar pattern from 2001 to 2007 when the Persimmon dividend grew every year, from 12.8p to 51.2p.

On the other hand, 2009 to 2015 was a bleak dividend winter for shareholders, with an average payout of 1.2p a year and four years when the figure was zero.

Housing is a boom-and-bust sector, and I fully expect Persimmon to cut its dividend when the next crash comes. With mortgage borrowing costs rising and inflation cutting into people’s disposable income, I don’t think the next housing bust is far away. I’ll be avoiding Persimmon shares.

Sitting on a copper mine

Rio Tinto (LSE:RIO), a multinational mining company, pays the second-highest dividend yield on the FTSE 100 at 12.3%. From aluminium to iron ore, copper, uranium, and diamonds, Rio Tinto’s £60bn revenue in 2021 is well diversified across a broad basket of commodities.

Unfortunately, Rio Tinto’s low price-to-earnings (P/E) ratio of five isn’t the screaming buy signal I might assume it to be. Companies in cyclical sectors (like mining) tend to show their lowest P/E ratios just at the top of the cycle. That’s because earnings swell as the price of the commodities they sell skyrocket.

It’s true that high interest rates and Covid lockdowns in China have already conspired to drag down commodity prices in 2022. However, I suspect they might have further to fall if major economies dip further into recession in 2023 and 2024 than currently expected.

Still, Rio Tinto’s dividend history doesn’t tell the same famine-and-feast story as that seen with Persimmon.

It’s true there have been occasional years since the turn of the millennium when the dividend rose and fell precipitously. However, taking a three-year moving average of Rio Tinto’s dividend payments from 2000 to 2020 shows a fairly smooth line of consistent growth.

I plan to add Rio Tinto to my portfolio, because I’m bullish on what the ‘green revolution’ and population growth mean for commodity demand long term. In addition, the dividend payment is well covered by earnings.

That gets my inner contrarian twitching. Is this now a wonderful opportunity to load up?

Temptingly cheap

One reason to think this might be the case is that Persimmon already trades at just five times forecast earnings. That’s seriously cheap relative to the UK market as a whole.

Currently, Persimmon shares also boast a monster 19% forecast dividend yield. When even the best instant-access cash savings account still only generates a paltry 2.75% in interest, that’s got to be worth the added risk that comes with buying stocks and shares, right? After all, it would cover inflation (10.1% in September) and then some.

Aside from having an emergency fund, locking money up in the bank doesn’t appeal. But things aren’t quite that simple.

How safe is that payout?

One of the challenges facing any investor wanting income is judging the odds of actually receiving that income. Sadly, there can be no guarantees. As a general rule however, a sky-high dividend yield is usually something to be wary of rather than embraced. It’s often just the result of a company’s share price falling because the market is concerned about what’s coming.

I think this is true to some extent here, even though Persimmon had a higher-than-average yield long before the multiple crises of 2022 unfolded. The economic background is hardly bullish for the sector, especially if interest rates keep climbing. The latter, when combined with squeezed incomes, will likely put (some) people off buying a new home. That doesn’t bode well, especially as earnings at Persimmon are expected to only just cover this year’s total cash return.

So I do think there’s a real risk that Persimmon might reach for the scissors. The question I’m asking is how much this would bother me?

In better health

My personal view is that what’s happening in 2022 doesn’t feel like a repeat of what came to pass during the Great Financial Crisis. Back in 2007, housebuilders saw their valuations plummet as their very survival was under question. These days, the balance sheets of the UK’s biggest builders — including Persimmon — are looking far more robust.

Because of this, I can’t see dividends being wiped out completely. Even if a cut were made, there’s a good chance that the stock will still generate a sizeable amount of passive income and probably a lot more than they’d get from a bog-standard FTSE 100 tracker.

Of course, one advantage of holding the latter over Persimmon shares would be the diversification that it brings. “You pays your money and you takes your choice“, as the saying goes. This is why correctly judging my own tolerance to risk is so vital.

Watchlist-bound

All things considered, I’m tempted to buy at the current level. However, this would be conditional on me being able to accept that the share price could have further to fall and the dividend stream might be reduced.

If I were to dip my toe in, I’d also wait until after the firm’s next trading update, due 8 November. For now, Persimmon goes on my watchlist.

Here’s a low-cost Footsie share I’d sell and one I plan to hold onto.

Sainsbury’s

J Sainsbury (LSE: SBRY) would, in days gone by, have been a hot safe-haven stock with investors. The scale of the inflationary crisis, however, has prompted shareholders to offload their holdings.

I’d be tempted to sell any Sainsbury’s shares that I held, too

With consumer price inflation hitting 40-year highs, even demand for food and essentials is slumping. A Which? survey shows that 85% of people are now spending less on groceries. A worrying proportion are also skipping meals altogether to save cash.

Increasing costs are also putting pressure on supermarkets. Sainsbury’s raised staff wages for the second time in 2022 last month. The company’s profits are also being battered by rising energy and product costs as the Ukraine war drags on.

I like the FTSE 100 firm’s rapidly expanding online operation. The potential returns here are huge as the e-commerce sector grows.

Internet sales at Sainsbury’s were up 94% versus pre-pandemic levels during the 16 weeks to 25 June.

But those current issues I mention — along with the long-term problem of steadily-increasing competition — make it a risk too far in my opinion. That’s even though J Sainsbury shares trade on a forward price-to-earnings (P/E) ratio of nine times and a carry a 6.6% dividend yield.

Persimmon

Persimmon’s (LSE: PSN) ultra-low share price during the summar was too good for me to ignore. Even now it continues to offer excellent all-round value. The housebuilder trades on a forward P/E ratio of 4.9 times and carries a splendid 18% dividend yield.

I wouldn’t buy the housebuilder today, although I plan to hold onto my shares. The prospect of soaring interest rates and a subsequent fall in homes demand has tempered my bullishness.

Mortgage costs are soaring because of heightened economic and political uncertainty. Rates hit fresh 14-year highs late last week. And more hefty hikes are predicted, driven also by runaway inflation.

However, I’m holding my Persimmon shares as the long-term outlook for housebuilders remains robust. Weak housebuilding rates mean that Britain’s stock of new homes continues to be low. I believe that when economic conditions improve this supply and demand imbalance will widen sharply again, thrusting home prices higher again.

I also like Persimmon in particular because, unlike most other housebuilders, it manufactures some of its key materials. These include bricks, tiles, timber frames, and wall panels. It even installs ultrafast broadband through its FibreNest division.

This helps reduce risk to the company’s profits. It cuts costs and gives the company better control over the supply chain. This in turn reduces the chances of production targets being missed due to third-party problems.

However, many of the smaller companies in the FTSE have logged much bigger share price falls. For example, housebuilders Persimmon (LSE: PSN) and Barratt Developments (LSE: BDEV) have both fallen by around 50% over the last year.

Rising mortgage rates and fears of a recession have prompted shareholders to sell. Barratt and Persimmon shares are now trading at levels last seen at least five years ago.

Neither company has cut its dividend — yet — which means that both stocks offer forecast dividend yields of 10% or more.

Share prices usually bottom out before the real-world economy starts to recover. I’m thinking about buying one of these housebuilders as a contrarian play on a UK recovery.

Persimmon: maybe not

Persimmon’s share price has fallen to 2014 levels over the last year. The stock now offers an incredible forecast yield of 18%.

I’ll start by saying that I think Persimmon’s dividend is very likely to be cut. The reason for this is that the company is currently paying out almost 100% of its profits as dividends each year. If profits fall — which seems likely to me — then the dividend could quickly be left without any earnings cover.

Admittedly, accounting rules would allow the company to continue paying its dividend using its historic ‘retained profits’. However, this could quickly use up Persimmon’s cash reserves, so I’d see it as a short-term solution, at best.

Of course, I could be wrong. Persimmon’s houses are typically sold at more affordable price points than some rivals, so the company continues to trade well, despite soaring mortgage rates.

We’ll find out more when the firm reports its third-quarter trading in early November. But, for me, Persimmon shares aren’t cheap enough yet.

Is FTSE 100 favourite Barratt a better choice?

I’m more positive about Persimmon’s rival Barratt Developments, which sells more expensive homes.

Unlike Persimmon, Barratt shares are now trading below their book value, providing some safety margin against falling property values.

Barratt’s dividend also looks stronger to me. The stock’s forecast yield of 10% is still very high, but this payout is covered twice by forecast earnings. In my view, this makes a dividend cut less likely, even if the value of Barratt’s land and unsold homes falls.

In its third-quarter update, Barratt warned investors of a 35% drop in new sales compared to the same period last year. The company said customers were worried about mortgage rates and struggling with “reduced mortgage availability”.

What I’d do now

Broker forecasts suggest Barratt’s profits could fall by around 10% this year. A further 20% fall is expected in 2023/24, before a recovery in 2024/25.

At this stage, these are only guesses. I think it’s fair to say that things could still get much worse.

However, based on these estimates, my analysis suggests that Barratt’s 10% dividend yield might be sustainable. So I’d consider opening a small position in Barratt shares today, with a view to buying more shares when the company’s performance stabilises.

How I generate passive income

I love passive income: the earnings I make without effort, without working, and even while I sleep. Rather than slaving away in another job or side hustle, I generate passive income from my assets.

I don’t own any investment property/real estate, so I don’t collect rental income from tenants. Also, I don’t expect to get rich by saving, so I don’t keep piles of cash in deposit accounts. Likewise, I don’t own any government and corporate bonds, so I don’t get interest from these fixed-income securities.

For me, history has shown that the best way to generate passive income is by buying equities (stocks and shares) that pay dividends. These are regular cash payments paid by companies to shareholders, usually half-yearly or quarterly.

The big problem with share dividends

Right now, cheap UK shares offer some of the highest dividend yields among major asset classes. For example, the FTSE 100 index has a cash yield of 4.2% a year. But dozens of UK-listed shares offer much higher levels of passive income than this.

Now for the bad news: company dividends are not guaranteed, so they can be cut or cancelled at any time. During the Covid-19 crisis of 2020, many big businesses cut or cancelled their cash pay-outs. Similarly, if the UK economy goes into recession in 2022-23, then company dividends might decline.

When share prices slump

As an example of one FTSE 100 share that I own to generate passive income, take UK housebuilder Persimmon (LSE: PSN). Alas, this stock has had a terrible 2022; here’s how it’s fallen over various timescales:

This share has lost value over all seven periods, ranging from one day to five years. Gruesome. But as share prices decline, dividend yields rise (all else being equal). As a result, the potential passive income from this stock has skyrocketed this year.

This income share yields nearly 20% a year

As I write, this share trades at 1,213.5p, giving it a market value of £3.8bn. Yet the group’s latest full-year dividend of 235p a share equates to a dividend yield of 19.5% a year. In my experience, it’s very rare for FTSE 100 dividend yields to reach such elevated levels. Either share prices rebound and cash yields reduce, or dividends get slashed and yields drop.

As things stand, if I bought 426 Persimmon shares today, it would cost me around £5,170. If — and that’s a big if — the company doesn’t cut its dividend, then 235p times by 426 shares produces passive income of £1,001.10 a year for me. Wow.

Then again, with energy bills soaring and interest rates rising, I’m expecting an economic recession in 2023 and tough times for the UK housing market. Even so, I won’t sell my shares in Persimmon — not for now, at least!

The shares peaked in February 2020

During the market’s summer lull, my wife and I built a new mini-portfolio of 10 cheap shares. We bought these value stocks for their low price-to-earnings ratios and high dividend yields. Our intention was to create a new source of passive income, either to reinvest or to offset our rapidly rising household bills. And of six FTSE 100 shares we bought, one was leading UK housebuilder Persimmon.

Founded in 1972 and based in York, Persimmon is named not after the reddish-orange fruit, but for a prize-winning racehorse owned by the Prince of Wales (later King Edward VII). The group has almost 5,200 employees and trades under the Persimmon Homes, Charles Church and Westbury Partnerships brands.

From 2010 onwards, the property boom provided great riches to the company, its directors and shareholders. At their peak, Persimmon shares hit an all-time high of 3,328p on 20 February 2020. But then the pandemic exploded, sending share prices crashing worldwide.

This stock has had a terrible 2022

After more than halving during the spring 2020 global meltdown, the share price staged a massive comeback. Indeed, by 7 June 2021, the stock was riding high again, hitting its 2021 peak of 3,272p.

On 4 January of this year, Persimmon stock hit its 2022 high of 2,930p — but it’s all been downhill since then. After watching this stock plunge this year, my wife bought into Persimmon on 26 July at an all-in share price (including dealing commission and stamp duty) of 1,856p.

Oh boy, what a mistake. As I write, Persimmon shares trade at 1,194.5p and are down 3.6% today. At this level, they’ve crashed by more than a third (-35.6%) since our purchase date. That’s easily my worst trade in at least a decade. Ouch.

Do I sell out?

Right now, things look bleak for the UK housing market. Over the winter months, domestic energy bills may triple or quadruple, putting huge pressure on household incomes. What’s more, UK mortgage rates have exploded, hitting a 14-year high earlier this week. This has made buying a new home much harder than it was just three months ago. And political turmoil continues to shake the British pound and UK government bonds.

However, we won’t be selling our Persimmon shares quite yet. At the current price, they trade on 5.2 times trailing earnings, for an earnings yield above 19.2%. Also, the previous full-year dividend of 235p translates into a colossal cash yield of 19.7% a year. Then again, given the headwinds facing new home sales, I fully expect Persimmon’s earnings and dividend to be slashed in 2022-23.

In short, we won’t be selling our stock, because we bought into this business on a 10-year view. Indeed, we may even buy more shares if the Persimmon share price keeps on falling!

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.

Persimmon

Persimmon’s (LSE: PSN) sinking share price has prompted me to consider topping up my holdings. The housebuilder’s fresh descent in recent sessions has sent its dividend yield to an eye-popping 18.5%. Meanwhile, its corresponding P/E ratio has toppled to 4.9 times.

Persimmon has been an excellent dividend-paying stock over the past decade. Due to the UK’s chronic homes shortage and government inaction to boost build rates I think the long-term outlook for shareholder returns looks attractive too.

But with homebuyer demand slipping I’m happy to delay increasing my holdings. Property listings business Zoopla says that enquiries on its website have fallen by a fifth in the past fortnight. This follows the release of the government’s mini-budget that pushed up mortgage rates.

Worryingly for Persimmon, mortgage rates are in danger of further heavy rises in the weeks and months ahead. This reflects ongoing turbulence in bond and currency markets as well as ongoing pressure from runaway inflation.

Barratt Developments underlined the trouble that higher rates are causing last week.

In its latest trading statement, it said reservation rates fell by a third between 1 July to 9 October. It attributed “wider economic uncertainty” and “increased mortgage interest rates and reduced mortgage availability” as the factors behind the slump.

I’m expecting Persimmon’s next market update on 8 November to confirm the turbulence affecting the housing industry. Until the outlook becomes clearer I won’t be building my position in this stock.

DS Smith

However, I am tempted to add to my holdings in DS Smith (LSE: SMDS). The packaging manufacturer has recovered ground in more recent sessions, but I believe it remains heavily oversold in 2022, as recent trading news suggests.

Today, DS Smith’s share price carries a P/E ratio of just 7.6 times for this year. Its dividend yield sits at a healthy 6.2%.

Soaring cost inflation poses a threat to the cardboard box maker. But, so far, the company is being able to effectively navigate the problem.

DS Smith has been increasing prices and introducing cost-saving measures to protect its margins. And the huge success of these measures led to the business hiking its half-year profits forecasts on Tuesday.

It now expects adjusted operating profit “of at least £400m” in the six months to October, it said. That’s up from the £276m it reported in the same 2021 period.

I think the critical role that DS Smith’s products play in e-commerce should deliver exceptional profits growth in the coming years. It’s also my belief that sales should rise following its decision to ditch plastic packaging amid accelerating customer demand for greener solutions.

I bought my DS Smith shares back in 2018. I plan to hold them for the long haul.