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

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »