2 inflation-busting dividend investments for a starter portfolio

These dividend stocks offer a hedge against higher inflation.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Inflation presents special challenges to investors. That’s because if you want to preserve the spending power of your investments, you will need to earn a rate of return which is at least equal to the rate of inflation.

With UK interest rates currently well below the inflation rate, cash is a big loser. Thankfully though, there are some investments that could actually benefit from higher inflation, and today I’m going to take a closer look at two of them.

Property

Property investments are a natural hedge against inflation, since landlords have the ability to periodically review rents to reflect unexpected bouts of inflation, among other market factors. And as property represents a ‘real’ asset, property values have held up well against inflation over the very long term.

Landlords can also get added protection through the linking of rent increases to the rate of RPI-inflation. Secure Income REIT (LSE: SIR) is one such commercial property landlord which has taken advantage of these RPI-linked leases.

The REIT has much greater income predictability than most property portfolios, given that 86% of its rental income comes from leases which benefit RPI protection, while a further 13% have fixed uplifts.

Vacancy risk

It has also protected itself from the risk of vacancy by sticking only to long-term lets with strong covenants. With a weighted average unexpired lease term of 22.2 years, and no break options, it has one of the longest average unexpired lease lengths in the REIT sector. This means its rental income should hold up well even during if economic conditions turn sour.

One downside, however, is its high level of tenant concentration, which could increase the risks resulting from a potential default by a single large tenant.

Based on its Friday’s share price of 373p, the REIT currently offers a yield of 3.7% and trades at a 1% premium to its NAV.

Renewable energy

Infrastructure investments are another way to beat inflation, and in this sector, I’m keen on the Bluefield Solar Income Fund (LSE: BSIF). It is one of the biggest solar investment trusts in the UK, with a total net asset value of roughly £400m.

It has a great deal of protection against rising inflation, since it earns government subsidies, via Feed-in tariff and CfD subsidies, that are directly linked to the rate of inflation. In fact, management is so confident that rising inflation would benefit its earnings potential that it has in place a dividend policy which is linked to the rate of RPI inflation.

Reflecting the accelerating pace of inflation, its dividend growth has also accelerated. For its 2017 financial year, the company paid a total dividend of 7.43p per share, reflecting the RPI increase of 3.5% in July 2017.

The company also has some protection against rising interest rates since a majority of its debt is secured on fixed interest rate terms. This would mean that should the Bank of England attempt to combat higher inflation by raising interest rates, its average cost of debt would not rise by much — limiting the impact of a potential drag on its earnings.

Shares in the fund currently offer investors a yield of 6.6%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Here’s the Tesco share price forecast for the next 12 months!

Tesco's valuation has dropped to multi-year lows after recent share price weakness. Is now the time to consider buying the…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: March’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

I asked ChatGPT for the best FTSE 100 investment trust to buy… here’s what it said

There aren't many FTSE 100-listed investment trusts and according to ChatGPT there’s only one winner. Dr James Fox explores.

Read more »

Investing Articles

How much should investors put in an ISA to achieve the average UK wage in passive income?

Millions of Britons use the Stocks and Shares ISA as a vehicle to build wealth, but a successful investor can…

Read more »

Investing Articles

2 cheap FTSE dividend stocks to consider buying for an ISA

The deadline for using up the Stocks and Shares ISA allowance is almost upon us. Paul Summers has spotted two…

Read more »

Investing Articles

£20k in a Stocks and Shares ISA? Here’s how an investor could target £1,342 in passive income each month

Christopher Ruane explains how a long-term approach to investing a Stocks and Shares ISA could generate a four-figure monthly income.

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

Millions are missing out on ISA account benefits! Here’s what I’m doing now

Swathes of people are missing the chance to supercharge their returns with a Stocks and Shares or Lifetime ISA account.…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

Here’s my plan to survive and thrive in a stock market correction

A falling stock market can be an opportunity, but investors need a plan. Stephen Wright shares his strategy for taking…

Read more »