Dividend shares can be an excellent way to protect myself against soaring inflation. We learned yesterday that the UK inflation rate jumped to a whopping 9% in April amid a surge in energy and food prices. That’s the fastest pace in 40 years.
I’d want my investments to at least keep pace with rising prices, and one way is to own quality dividend-paying shares, in my opinion.
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The average FTSE 100 dividend yield is currently 3.75%. That doesn’t sound too bad, but right now it doesn’t keep up with rising prices. Instead, I’d look for a few high-yield shares to buy.
Which dividend shares?
So if I’ve got £3,000 to invest, which dividend shares should I buy today? I’d split my investment into two and invest £1,500 in each. My top picks happen to offer the highest dividend yields in the FTSE 100.
First I’d consider UK housebuilder Persimmon (LSE:PSN). Currently, it offers an 11% dividend yield. That’s very high, so I’d also need to consider if the company can afford to keep up with this level of payment.
Looking at its earnings and what City analysts think it will earn over the coming years, I’d say Persimmon can comfortably afford its generous dividend.
What’s more, this company is committed to returning cash to shareholders. Persimmon isn’t just about dividends though. It’s a high-margin business with a strong balance sheet. Its business is also supported by a long-term shortfall in UK housing.
Good value in housebuilders
There are some things to bear in mind, however. Low interest rates have helped the UK housing market, but that could be about to change. The Bank of England signalled its intention to further raise interest rates this year to tackle inflation. This could potentially lead to a temporary slowdown in house prices.
That said, Persimmon’s share price has already dropped by 24% over the past year. I reckon it currently represents good value. If we see a recession, the share price could remain bumpy. But at least I could earn a regular 11% in dividend income while the economy recovers.
My next inflation-busting dividend yield is from Rio Tinto (LSE:RIO). Like Persimmon it also offers 11%. But the similarities don’t end there. Both companies operate with a double-digit profit margin, and a double-digit return-on-capital-employed. That’s a measure of good business quality. So it’s impressive so far.
This global iron ore miner should also benefit from rising commodity prices over time. So, in addition to its above-average dividend yield, it also offers attractive growth potential.
Profits have soared from $4.6bn in 2016 to more than $21bn last year. And given its dominance in the industry, I’d expect it to be a long-term winner.
Bear in mind that mining is cyclical. Any deep economic contraction could lead to lower metal prices in the near term. China’s economic policies also have a meaningful impact on steel prices, so it’s a factor that I’d watch.
Overall though, I like both of these dividend shares and would consider adding them to my Stocks and Shares ISA today.