US inflation came in worse than expected yesterday. The Consumer Prices Index (CPI) rose 7.5% over a 12-month period including January – the most in four decades! It’s not great in the UK, either. CPI is expected to rise to 5.8% in the second quarter compared to the same period in 2021. This isn’t great for me as a consumer. But, it’s also not great for me as an investor. I want to generate returns above the rate of inflation, after all. So, I’ve been looking at which FTSE stocks I’d buy to give me the best chance of beating inflation. Here’s what I’ve found.
Real estate investment trusts
The first place I’ve been looking at is the real estate investment trust (REIT) sector. REITs are companies that manage a portfolio of property investments. If I bought shares of one, I’d be gaining exposure to a diversified portfolio of real estate.
A REIT can offer me both capital gains from share price rises, and potentially high levels of income from the rent it earns. In fact, it has to pay out at least 90% of its taxable earnings as a dividend to shareholders. One other factor I like about them is that I’d benefit from the general rise in property prices over time. This can act as added protection from rising inflation.
One particular REIT that I’d buy is Tritax Big Box, a FTSE 250 member with a current market value of £4.4bn. It manages a portfolio of large-scale warehousing for the logistics sector. There’s been a huge boost in demand for prime-location warehousing from the growth in online shopping. Tritax’s tenants are also subject to inflation-linked rent reviews, so this brings an added benefit to my portfolio.
There are still risks to consider when buying REITs though. For one, occupancy rates have to remain high if the company is to keep generating rental income. Also, they often have significant levels of debt that they issue to acquire further properties. It’s something I should keep in mind before buying any shares.
FTSE dividend payers
I’d also buy high-dividend-yield stocks to try and generate a real return in my portfolio. There are plenty of options in the FTSE indices for me to choose from. One potential risk with dividend stocks is that they’re never guaranteed income streams. A company has to remain profitable if it’s to pay a dividend. That’s why it’s always important for me to thoroughly analyse the companies before I buy any shares.
To start, I would add to my positions in British American Tobacco and Legal & General. Both of these companies are in the FTSE 100, and have forward dividend yields above the expected UK inflation rate for this year.
For added diversification, I’d consider positions in Persimmon and Barratt Developments. These large homebuilders are well placed to address the UK’s housing shortage. They also both offer dividend yields above expected inflation.
These companies could struggle in the years ahead, for instance if there was a recession. Profits could fall, and my dividends could be cut. Nevertheless, I think the high dividend yields above inflation make them attractive buys for me today.
