3 ways I can invest £1,000 in inflation-beating stocks

Jon Smith explains several different ways that he can consider in order to try and make a real return with inflation-beating stocks.

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.

Inflation in newspapers

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Key Points

  • With inflation remaining above 5%, different investment options can be attractive.
  • I can consider tracker funds, high-growth stocks and dividend stars
  • Historically-inflation-beating stocks don’t offer any guarantee of future performance

The latest inflation figure for the UK economy was released yesterday. It showed that in December, the price level rose by 5.4% year-on-year. This meant another month where inflation was rising, up from 5.1% the month before. At a basic level, inflation is my enemy as it erodes the value of my money. So here are a few ways that I can invest £1,000 in inflation-beating stocks.

FTSE 100 tracker funds

Tracker funds mimic the performance of the underlying index being followed. As well as capturing the share price movements of the stocks, they will receive and pay out dividends. For the FTSE 100, the current average dividend yield is 3.31%. Over the past year, the FTSE 100’s share price has risen by almost 13%.

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So when I pull this all together, a FTSE 100 tracker over the past year would have enabled me to own a cohort of inflation-beating stocks. If over the course of the next year I can pick up 3%-3.5% from the dividends and 3%+ from any index gains, my £1,000 will have beaten the current level of inflation.

On the downside, a tracker does put me at the mercy of broader market sentiment. For example, if we see Covid-19 worry investors again, the index will likely fall. If I just own a few stocks that actually have performed well during the pandemic, I might not see any losses.

Targeting high growth stocks

I can try and outperform an index by picking a smaller group of inflation-beating stocks. These could be those that are on a high-growth trajectory. For example, the Royal Mail share price jumped 49% in 2021. Again, I can’t guarantee future returns based on past performance, but it’s a good example of a stock that I like that could gain another 5%-6% this year to offset inflation.

Another example is NatWest Group. I think banking stocks could perform well this year in general due to higher interest rates. The share price is up 58% over the past year. Similar gains for this growing bank could help me in 2022.

Inflation-beating dividend stocks

Finally, I can consider investing in specific stocks that offer a generous dividend yield. There are currently a dozen in the FTSE 100 and 10 in the FTSE 250 that offer a yield of 6% or greater. Some examples that I like are CMC Markets, with a yield of 10.52% and Rio Tinto with a yield of 8.89%.

The idea here is that if I invest some of my £1,000 in these dividend stocks, I’ll receive the income payout over the course of this year. If the dividend per share remains the same, then it’ll offset the erosion from inflation. In fact, with yields above 6%, it’ll give me a positive real return.

Of course, I need to be cautious when trying to estimate future dividends. They can be unpredictable and can even be cut depending on company performance.

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Jon Smith and The Motley Fool UK have 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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