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Could UK inflation be in double digits next year? I’m trying to protect myself with this dividend paying ETF

Inflation in newspapers
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According to the Office for National Statistics the UK inflation rate rose to 4.2% in October. Demand for oil and gas is pushing up energy bills across the world. Shortages of many goods, because of factory shutdowns due to covid restrictions, are pushing up prices. If this trend continues then we could easily see double-digit inflation next year.

My plan for protecting myself

I believe that high dividend paying shares can be a hedge against inflation. My thinking is simple. These high dividend paying companies tend to be established firms in stable sectors. In times of rising prices, they should be able to increase the prices of their goods or services and maintain or increase their dividends more than the rate of inflation.

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For my own portfolio, I’ve always liked ETFs (exchange-traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low cost.

The ETF I’ve been looking recently at is SPDR S&P UK Dividend Aristocrats ETF (LSE:UKDV). This fund tracks the S&P UK High Yield Dividend Aristocrats Index.

This index follows the 40 highest dividend yielding UK firms that have either increased or maintained their dividends for at least seven consecutive years. It also focuses on large businesses since new entrants to the index have to have a market cap of at least $1bn. The companies also have to meet the index’s liquidity requirements.

Companies in this ETF are mostly large blue-chip companies across a variety of sectors such as insurance, mining, and pharmaceuticals. Household names include the likes of Legal & General, Rio Tinto, and GlaxoSmithKline.

The ongoing charge is a very reasonable 0.30%. The current dividend yield is 3.77%

Am I going to invest?

Though it might not appeal to all investors, I like this ETF. It has a high eligibility criterion and is well diversified across sectors.

Although, it’s worth me remembering there are risks. Some of these high dividend paying companies will be established, successful firms that are great at generating free cash flows. However, some will feel they have to maintain high dividends to keep their investors happy when the business is not growing. In the long run, companies like these are unlikely to prosper.

Looking at the performance, the one-year return excluding dividends is about 9% and over five years the fund is down about 9%. However, taking the dividends into account, the fund would have provided me with a decent total return over both time frames.

On balance, given that the UK inflation rate could reach double digits next year, I’m seriously contemplating adding this high dividend paying ETF to my portfolio.

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Niki Jerath has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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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