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3 Shares To Beat Inflation: National Grid plc, Royal Dutch Shell Plc And GlaxoSmithKline plc

It might seem that all is quiet on the inflation front. It had certainly slipped to the back of my mind. But a recent article by economist David Smith in the Sunday Times brought it abruptly back.

Mr Smith pointed out that the UK’s inflation — 2.7% CPI and 3.2% RPI — is more than double the EU rate. It’s higher than in booming China, and in the whole of the OECD only Turkey, Mexico and Iceland have higher inflation. UK inflation consistently overshoots Bank of England targets.

Struggling to find a specific cause, Mr Smith concludes that high inflation is hard-wired into the UK’s economy. With growth starting to pick up, there’s a risk it could go higher.

Inflation-resilient

So it could be a good time to add a few inflation-resilient stocks to your portfolio, especially if you’re looking to secure income returns. High-yield shares that do well in inflationary environments include regulated utilities, the commodity sector and companies that have pricing power, typically because spending on their products is non-discretionary.

There’s no better example in the utilities sector than National Grid (LSE: NG) (NYSE: NGG.US). It’s currently yielding 5.4%, and management intend to increase the payout at least in line with inflation “for the foreseeable future”.  Their crystal ball is helped by an eight-year settlement with the regulator in the UK, where two-thirds of profits are generated.

Investors in UK utilities have re-discovered political risk, with politicians and social commentators queuing up to bash energy companies for inflation-stoking price increases. But National Grid doesn’t have retail customers so there’s no cheap publicity to be got by attacking it.

Commodities

Commodities are a traditional inflation hedge. Miners are in a cyclical downturn so a safer bet is oil. I like Shell (LSE: RDSB) (NYSE: RDS B.US) for its 5.2% yield and 9.6 P/E. The market has punished a drop in earnings caused by its investment into US shale, where prices have plummeted. But that’s oil and gas in the ground, a very real asset.

Ten years’ worth of reserves underpin Shell’s solidity, while completion of several major developments and a big position in liquefied natural gas power a prodigious cash flow.

For a company with pricing power, I’m choosing GlaxoSmithKline (LSE: GSK), which has a 4.9% yield. Demographics are working in its favour, and the company looks to be emerging successfully from the industry’s ‘patent cliff’. It has a number of promising new drugs in the pipeline, and the scale to turn R&D expenditure into future products. Vaccines and non-prescription healthcare add ballast.

Buying opportunity

GSK has caught a cold in China, where sales have plummeted with revelations of bribery. With the shares down 12% from their recent high, it’s a buying opportunity if you think that’s a passing malady.

These are three good high-yielding shares, but National Grid wins the accolade of the Motley Fool's Top Income Stock.  You can read more about it in an exclusive report.  Just click here to download the report straight to your inbox -- it's free.

> Tony owns shares in National Grid, Shell and GSK. The Motley Fool has recommended shares in GSK.