The Bank of England has now warned that inflation could rise above 5% by the beginning of 2022. How, as a Foolish investor, can I respond?
One option would be to pay more attention to stocks that have a solid record of increasing dividends and thus helping to maintain (and potentially improve) my buying power. Fortunately, I think there are a number of stocks in the FTSE 100 that tick this box.
It may lack the excitement of your average, unprofitable tech stock, but Bunzl (LSE: BNZL) keeps raising its dividends year after year. Analysts expect the international distributor to return 56.1p to holders for FY21 — up around 3.7% from FY20. This would give a yield of 2.2% at the current share price.
Now, that’s admittedly a lot lower than some firms in the FTSE 100. However, my objective here is not to look for the largest yield, especially if it’s not moving higher. A big but stagnant dividend suggests a company is treading water. More often than not, this payout is eventually cut, or wiped completely.
By contrast, a consistently rising payout tends to be indicative of a well-managed, healthy business. When added to capital gains, this potentially makes Bunzl a better bet for reducing inflation risk.
One potential drawback however, is the relatively pedestrian performance of its share price. BNZL has climbed only 5% in value over the last 12 months. That’s not necessarily a deal-breaker, but it does make maintaining its dividend growth record vitally important.
A second FTSE 100 stock I’d be tempted to add to a passive income portfolio is insurance giant Legal & General (LSE: LGEN). Bar the odd exception (e.g. the anomaly that was 2020), L&G also has an excellent record of hiking its dividend.
Analysts are predicting the £17bn-cap will pay investors 18.4p per share in FY21. That’s a 4.6% increase from the previous year. It also gives a monster yield of 6.5% at today’s share price.
This is not to say that everything will be plain sailing. LGEN’s outlook is very much tied to the health of the wider economy. Back in March 2020, for example, the stock pretty much halved in value. This serves as a reminder that investing in even the most established FTSE 100 companies involves risk.
Then again, it might be said that Legal’s price tag already gives investors a decent margin of safety. Right now, I can pick up the shares for a little less than nine times forecast earnings.
FTSE 100 core holding
A final top-tier company with a history of rewarding income seekers is BAE Systems (LSE: BA). The defence giant is in line to increase its total dividend by 3.6% in FY21, giving a yield of 4.2%.
As things stand, that won’t be enough to keep up with inflation on its own. However, it still looks hugely attractive when you’ve got Cash ISAs returning roughly one-tenth of this amount (and thus doing very little to stop the value of any deposit being eroded).
One thing all dividend hunters must accept, of course, is that increasing payouts can’t be assumed. Given that defence spending can be rather lumpy, that’s particularly worth remembering with BAE.
Still, I’d say this is already accounted for in the valuation. Despite its share price rising 30% in the last year, BAE stock currently trades on just under 13 times predicted earnings.
The Bank Of England has acknowledged that inflation is likely to peak above 4%, and stay there until the second quarter of 2022.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl. 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.