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2 hot stocks I’d buy with dividends yielding 5%+

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Although inflation remained at 3% last month, it is forecast to rise in the coming months. The recent interest rate increase by the Bank of England is likely to have a time lag, and it was also followed by comments from policymakers that a loose monetary policy will remain in place over the medium term. As such, the pound looks set to remain weak, and this could lead to a higher rate of inflation.

Overcoming the threat of a negative real income return may become more important for investors. After all, reduced spending power can create challenges. With that in mind, here are two companies which could offer inflation-beating dividend yields in the long run.

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Improving performance

Royal Mail (LSE: RMG) reported relatively upbeat first-half results on Thursday. The company’s cost-cutting initiatives seem to be having an impact, with adjusted UK parcels and letters operating costs falling by 1% versus the same period of the prior year. The company has also invested heavily in its UK operations, and this produced a rise in parcel volumes of 6%. Flat revenue in the company’s wider UK operations is likely to be seen as a good result by investors, since it has generally been a tough market in recent years.

In Royal Mail’s other core division, GLS, its performance was stronger than in the UK. Sales rose by 9% and a focus on potential acquisitions could help to increase its overall weighting over the medium term. The positive performance of GLS meant that the company’s total revenue moved 2% higher on an underlying basis versus the first half of the prior year.

With a dividend yield of 6.3%, Royal Mail looks set to offer a high real income return over the medium term. Its current level of payout is covered 1.6 times by profit, which suggests it is highly sustainable. Therefore, it could be a sound means of beating inflation.

Uncertain future

Also offering a dividend yield which is above and beyond inflation is Berkeley Group (LSE: BKG). The luxury housebuilder has a dividend yield of 5.3% at the present time, with its shareholder payouts being covered around 2.5 times by profit.

However, the company’s outlook appears to be rather uncertain. Demand for luxury properties in London and the South East has fallen since the EU referendum, and this trend looks set to continue. Even a weaker pound has not yet enticed international buyers back to the market. This is a key reason why the company’s bottom line is forecast to fall by 30% in the next financial year.

Despite this, Berkeley could be a worthwhile buy right now. It has a forward price-to-earnings (P/E) ratio of 10.8, which suggests that investors have already factored-in its disappointing earnings outlook. And with its dividend cover being high and confidence likely to return to the prime property market in future, its current valuation could be an opportunity to buy it for the long term.

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Peter Stephens owns shares in Royal Mail and Berkeley. 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.

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