Inflation in the UK hit 9% in April — its highest level in 40 years. Even if you didn’t catch yesterday’s announcement, you’re probably already aware of just how quickly the cost of living has increased. While there’s no quick solution to this, I continue to regard blue-chip stocks offering passive income via dividends as a way of taking some of the sting out of rising prices. Here are three examples from the FTSE 100 that I’d buy.
Legal & General
Like most stocks, insurer and asset manager Legal & General‘s (LSE: LGEN) share price has been in poor form. At yesterday’s close, it was down 8% in a year. On a more positive note, the company is one of the biggest-paying dividend stocks in the FTSE 100 and the UK market as a whole.
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Analysts have the company yielding 7.6% this year. That’s clearly below the current rate of inflation. However, the emphasis here is on doing what I can to reduce the eroding power of rising prices. Very few stocks are currently on course to beat inflation through dividends alone.
If I do have one concern here it’s that retirement planning won’t be foremost in people’s minds if they’re concerned with covering their monthly bills. As such, earnings growth may remain muted the longer inflation sticks around.
As a silver lining to this cloud, the shares aren’t exactly expensive to buy. They trade on a P/E of just seven.
Another stock that I’d be tempted to hold for the passive income it throws off is Vodafone (LSE: VOD). Shares in the telecommunications behemoth are currently yielding 6.5%. Again, this won’t be enough to stop inflation in its tracks. However, it will arguably give me better protection compared to a typical growth stock where I might be completely reliant on capital gains.
Like Legal & General, the investment case isn’t perfect. Dividends haven’t always been covered by profit. Moreover, the company has an awful lot of debt on its balance sheet. The huge cost involved in regularly maintaining its infrastructure doesn’t help.
Still, adding Vodafone to my portfolio will give me access to a sector to which I currently have no exposure. This may help to diversify away some risk. It also presents as a rather defensive business to hold in tough times.
At 11 times earnings, I’m not surprised UAE telecoms group e& recently grabbed a 10% stake.
For even more diversification, I’d be tempted to add a housebuilder to the mix. Fortunately, there’s no shortage of options in the FTSE 100.
My preference is probably Taylor Wimpey (LSE: TW), especially given that it’s currently yielding 7.8%. For comparison, even the best instant access Cash ISA on the market pays out just 1% in interest. What’s more, Wimpey’s dividend payments look secure as long as earnings come in as expected. The £4.6bn company also has loads of cash on its balance sheet.
Unsurprisingly, one potential issue here is the rather bubbly housing market. The potential for a recession could mean a temporary fall in property prices and a reduction in transactions.
Personally, I think the market has already factored this into the valuation. A forecast price-to-earnings (P/E) ratio of less than seven looks great value.