Investing in UK shares can be a great way to beat inflation. Many companies pay dividends to shareholders out of their profits. Depending on the price I have to pay for the shares, I can pick up some pretty hefty dividend yields.
I’ve been screening for UK companies that offer inflation-busting yields. With the Consumer Prices Index rising 5.4% in December, these UK shares should provide real returns for my portfolio.
Exposure to the housing sector
The first company I’ve been researching is residential homebuilder Persimmon (LSE: PSN). It’s one of the UK’s largest businesses with a current market value of £7.5bn, which means it’s a member of the FTSE 100.
I think the income potential is highly attractive for me as a potential shareholder. In fact, if I bought the shares today, I’d be expecting a dividend yield of 10.2% in 2022. Of course, there’s never a guarantee with dividends. The business has to keep trading well and to generate profits for it to pay out cash to shareholders.
The housing shortage in the UK should mean that Persimmon stays profitable in the years ahead, in my view. According to the BBC: “In the 30 years to 2021, three million fewer properties were built than in the previous 30. The population, however, has increased by more than nine million.” Indeed, this places significant importance on companies like Persimmon. As such, City analysts are expecting revenue for the company to grow in each of the next two years.
One additional factor to consider is rising interest rates. The Bank of England has already raised its base rate twice since December. In doing so, the cost of a mortgage should rise, and this may reduce demand in the housing sector. It’s a potential challenge for Persimmons in the months ahead.
Nevertheless, I view the double-digit dividend yield as highly attractive for my portfolio. The structural tailwind from the housing shortage should also mean the company’s homes remain in demand. I’ll be looking to add the shares to my portfolio.
The next UK share I’m buying
I’ve also been considering adding to my position in mining company Rio Tinto (LSE: RIO). The minerals it produces are crucial for decarbonisation and electrification efforts, including for use in electric vehicle batteries, and building wind turbines.
The dividend yield is attractive as it stands. I’d be generating a yield of 9% in 2022 if I bought extra shares today. However, as mentioned, dividends can always be cut if the company’s profits fall.
On this point, a risk factor to consider is the volatility of commodity markets. For example, iron ore prices rocketed to a decade-high in 2021, but crashed back down to earth to end the year. This means Rio Tinto’s profits can be volatile, and therefore the dividend payments can be too.
A further point to note about Rio Tinto is its excellent cash generation. Analysts are expecting a free cash flow yield of over 10% in 2022, which means there should be ample cash left over for the dividend payment.
So, on balance, I’m happy to hold Rio Tinto shares in my portfolio and would add to my position. The current dividend yield is attractive and way above the rate of inflation today.
