3 shares to buy now with inflation-busting dividends

Inflation is high — and increasing. Our writer is eyeing this trio of shares to buy now for his portfolio, each with dividend yields higher than inflation.

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Inflation is on the march. One key measure of this, the Consumer Prices Index, rose 7.8% in the 12 months to the end of April. Consequently, I have been looking for shares to buy now for my portfolio that have a dividend yield higher than inflation. Here are three stocks I am considering.

Imperial Brands

With a 9.0% dividend yield, tobacco maker Imperial Brands (LSE: IMB) offers a payout rate higher than inflation. Not only that, but the company’s progressive policy means that it hopes to raise the dividend annually in coming years.

That increase may not be big – last year it was just 1% — but even if Imperial simply maintains its current dividend, the yield looks attractive to me. However, is that likely? After all, the company cut its dividend a couple of years ago and the market for cigarettes is in long-term decline.

Although I see that as a threat to Imperial’s profits, the question for me is just how long is the long term? After all, cigarette sales have been in steady decline for several decades already in many markets, yet last year Imperial still managed to record profits of £2.9bn. Its balance sheet is also in better shape than before, as it has been paying down debt.

For now, Imperial is trying to gain cigarette market share in five key countries. Along with its pricing power, that could help it keep eking out profits even in markets where total cigarette sales volumes are falling. The company’s brand portfolio could also help it grow new revenue streams in future, for example in areas such as vaping. For now I see Imperial as a cash cow business. The good news is that I can benefit from some of the cash that it is generating and paying out as dividends. That is why I would consider buying Imperial shares for my portfolio.


The investment manager M&G (LSE: MNG) offers a lower dividend yield than Imperial. But at 8.5%, it is still well ahead of the FTSE 100 average – and inflation.

Unlike tobacco, I reckon the total market size for its services could grow in the future. Financial services are an important part of a developed economy and I think future demand will be robust. M&G also benefits from a strong, well-established brand and reputation. That matters a lot in the investment management field. If people or institutions are going to entrust large amounts of their money to a business, they want reassurance that it is a reputable one.

On top of that, M&G’s stated policy is to maintain or grow its dividend each year. If it delivers on that and I buy it today, I could lock in an 8.5% yield. But as that is well above the FTSE 100 average, how dependable is it? Does the M&G share price and yield suggest investor scepticism that it can maintain its payout?

The reality is that no dividend is ever guaranteed. A recession could make customers pay closer attention to investment performance and move their portfolios accordingly. If M&G underperforms, it could see revenues and profits falling.

But I think the opposite is true, too. M&G might actually see business grow if its investment managers perform better than rivals at other firms. The company began this year promisingly, reporting net inflows of client funds. It is also currently buying back up to £500m of its own shares. I see that as a sign of management confidence in the financial health of the business and would consider buying its shares for my portfolio.

Henderson Far East Income

The pandemic and government regulations continue to hamper business in some key Asian markets. That could explain why the Henderson Far East Income (LSE: HFEL) investment trust has seen its share price fall by 7.9% over the past year.

Coincidentally, 7.9% is also the current dividend yield. Put like that, this might not seem like much of an investment – an attractive dividend only covering the capital loss. But that is based on the past 12 months – what about the future? I think the trust’s exposure to Asian companies could help its performance in coming years. A mixture of pent-up customer demand and long-term growth trends could mean that it benefits from Asian economic expansion in coming years.

The trust pays dividends quarterly and has raised its payout annually in recent years, although that is no guarantee that it will continue to do so. But its investment focus means that the trust managers are focussed on the sorts of holdings they think could provide strong income streams.

One risk with an income fund is that managers chase yield, which can lead to them making some poor long-term investment choices. The trust’s five-year track record is not reassuring in this regard, with the shares having lost 18% in value. Set against this are two things.

First, the income has been and remains substantial – if my focus was on inflation-busting income then the share price movement would not bother me too much if I felt the long-term potential of its portfolio remained strong. Secondly, I think the weak recent share price performance reflects ongoing nervousness in parts of the Asian economy. If that turns out to be correct, the trust’s current share price could be a buying opportunity for my portfolio.

Final thoughts

These three shares all have dividend yields higher than the current rate of inflation. But things can change. Inflation could keep getting higher. Meanwhile, inflationary pressures might hurt business performance and lead to dividend cuts.

But I think these shares could be a good fit for my portfolio because each of them has the potential for strong profits in coming years. In different ways, each could turn a wider economic challenge into a business opportunity. Imperial can use its pricing power, M&G could benefit from financial services customers looking for a new investment manager, and Henderson Far East Income could ride on the coattails of Asian economic growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane owns shares in Imperial Brands and M&G. The Motley Fool UK has recommended Imperial Brands. 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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