£1,000 to invest? Here’s how I’d beat inflation with top dividend stocks

With inflation in the UK at 2.5%, Jonathan Smith explains how he can use top dividend stocks to try to offset this risk via the income paid out.

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.

A year ago, inflation in the UK was running at 1%. Since then, increased economic activity post-lockdown has seen inflation levels rise quickly. The latest reading was 2.5%, with the Bank of England forecasting that it could reach 4% at the end of the year. With this in mind, if I have £1,000 sitting in cash that I don’t need, I’m thinking about investing it in top dividend stocks.

Understanding the impact of inflation

Inflation erodes the value of my money. Let’s consider an example. If I kept my £1,000 in my current account, my interest rate is 0%. With inflation at 2.5%, it means that my purchasing power will decrease by 2.5% a year. Given that the Bank of England base rate is only 0.1%, I’m going to struggle to find any high-interest savings account or Cash ISA that will give me a 2.5% annual return.

The bottom line in this regard is that to avoid inflation eroding the value of my money, I need to find a return of at least 2.5% just to break even. With forecasts that it could run even higher, ideally I want to invest somewhere with a return of at least 4% to be on the safe side.

I could think that this is easier said than done, but top dividend stocks do offer me a solution for my £1,000. Clearly, nothing comes without a level of risk, but given the outlook for inflation, I’m happy to take on some risk in order to try and negate the impact of inflation.

Buying top dividend stocks

When I’m talking about a top dividend stock, I’m referring to a company that pays out income in the form of a dividend. As a shareholder, I can easily look at the amount of shares I own and the dividend paid per share. I can also relate this to the current share price and work out my dividend yield. 

Within the FTSE 100, the dividend yields vary. Some companies aren’t currently paying out any dividends. Others are, with some generous yields available. 

I don’t really want to get too greedy and target ultra-high yields as this could be risky. This could be because the yield is being boosted due to a falling share price. This could be bad news further down the line, as a company in trouble will likely cut the dividend as a way of helping its finances.

Even with this in mind, there are sustainable top dividend stocks within the index. In the 4-6% dividend yield range, there are currently a dozen different FTSE 100 stocks that I can put my £1,000 into.

I’d look to pick half a dozen of these and split up my £1,000 evenly into the mix. I feel this gives me a well-balanced overall portfolio of top dividend stocks. So even if inflation continues to move higher later this year, the income received via the dividends should allow me to offset this impact.

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.

jonathansmith1 and The Motley Fool UK have no position in any share 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

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »