UK April inflation just out hit an eye watering 9%, a large jump from the 7% previous reading from March. This was driven in gains pretty much across the board, with the highest sectors of increases being transport, utilities and household equipment. Regardless of the underlying points, the main discussion here is how to use stocks to offset the erosion caused by inflation.
Dividends in excess of inflation
The first stock we’d look at buying is Rio Tinto (LSE:RIO). This is a stock that has a generous dividend yield. The yield currently stands at 11.61%. In theory, if I buy the stock now and the dividend per share doesn’t fall in the future, my yield will remain at this level. So If I invested £1,000, then I would receive £116.10 per year in passive income.
This helps to offset inflation because if this £1,000 was sitting in my bank account, it would be losing 9% a year. Rather, by investing in Rio Tinto as a dividend play, my £1,000 will still be earning a positive yield, even after inflation is taken into account.
The risk here is that the dividend per share falls over time, or inflation rises in the future to a level above 12%. Personally, we like Rio Tinto as the company is benefitting from high commodity prices. Further, it has good exposure to Australia, which we think is an economy that could bounce back strongly from Covid-19 over the next year or so, helping trade with Asia and beyond.
Potential share price gains
The second inflation stock we like at the moment is Coinbase (NASDAQ:COIN). We wrote about the business last week following the slump after Q1 results. Although we acknowledge that the loss posted and the fall in monthly transactional users isn’t great, we see it as a blip. It’s part of the cyclical nature of the crypto space. We think that crypto in general has a bright future. So as a major crypto exchange, Coinbase will be at the center of this move.
but how does this relate to inflation? Well considering that shares hit all-time lows late last week and are down 76% over one year, we think that the share price will easily move 9% higher in the next year. Let’s say for example that the share price jumps by 15% in the next year and we sell the stock. Even when taking 9% inflation into account, we’ll still have generated a positive return.
The risk in this scenario is that our capital is at risk. If Coinbase shares fall, then not only do we lose from inflation but also from the underlying share price movements. Yet ultimately, to have a shot at offsetting inflation, we do need to take on some form of risk.
AlphaPicks owns shares in Rio Tinto. Please read our full disclaimers regarding the information published. The above is intended for informative purposes only and should not be taken as investment advice. Trading on leverage can result in losses larger than your initial deposit.