For a long period of time, high inflation wasn’t something I needed to worry much about. If I rewind to a year ago, UK inflation was just 0.2%. However, it has been moving higher in recent months with Covid-19 restrictions being eased. Higher spending and consumer activity has pushed the latest reading to 2.5%. This is above the Bank of England target rate of 2%. With this being the case, I’m thinking of using stocks as inflation-beating investments.
What I can do about inflation
I feel I need to look at stocks as inflation-beating investments as without it, the value of my cash will be eroded. This is because I have to take away the level of inflation from any return I make to get my net figure. For example, I could have bought a stock a year ago and sold it today with a gain of 5%. Yet my actual return is 2.5%, once I’ve accounted for the rate of inflation.
Fortunately, stocks can help me offset inflation in a few ways. As mentioned above, the potential share price appreciation is one way that can help me. If I can target and buy undervalued stocks that could deliver me strong returns in coming years, this can act as a buffer to offset inflation.
Another angle is to look for stocks that pay me a dividend. In theory, if I can buy stocks that offer me a dividend yield above 2.5%, then this can be an inflation-beating investment. Given that the average dividend yield of the FTSE 100 is 3.27%, this is definitely a realistic objective to have.
A potentially undervalued stock
In terms of undervalued stocks that could offer share price appreciation, I recently wrote about some here. For example, Hargreaves Lansdown shares are down 10% over the past year. It took a recent hit as half-year results showed that profit after tax fell slightly from £313m to £296m. Yet it opened accounts for a record 233,000 new clients.
That metric makes me feel optimistic about future growth at the company, as new clients bringing in money and using the platform to invest will help to drive revenues higher in the long run. This should have a knock-on impact of increasing the share price from its current low levels. If this is the case, then I’d expect it to beat inflation.
The risk with buying shares here is that if inflation really moves higher, it’ll put pressure on the Bank of England to raise interest rates. This could see the stock market wobble, causing investors on the Hargreaves Lansdown platform to panic-sell and pull their funds out.
An inflation-beating dividend stock
From a dividend perspective, I’d also look to invest in SSE. The energy company recently saw its shares spike due to an activist investor buying in. Even with this, the dividend yield still sits just above 5%.
I think the dividend is sustainable due to the outlook for renewable energy. The company also has good liquidity, with asset disposals on track to bring in £2bn. One risk comes from the new activist fund that’s buying shares. It could act as a corporate raider on the business, damaging it in the process.
Yet overall, if I’m looking for inflation-beating investments, I’d consider buying the above two stocks to help me out.
