UK shares: 1 cheap dividend stock I bought to combat inflation!

This Fool is on the lookout for the best UK shares to protect himself from soaring inflation. Here is one stock he bought recently.

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With inflation reaching levels not seen for 40 years, I am on the lookout for the best UK shares that could combat this and diversify my holdings. I believe Centamin (LSE:CEY) could be one such stock. Here’s why I added its shares to my holdings recently.

Gold miner

As a quick reminder, Centamin is a gold miner with projects throughout Africa. Its main project is the Sukari gold mine in Egypt.

When inflation rises, commodities such as gold are often seen as safe-havens as their prices rise. The price of commodities such as gold are not directly linked to inflation and have different pressures.

So what’s happening with Centamin shares currently? Well, as I write, they’re trading for 75p. At this time last year, the stock was trading for 104p, which is a 27% drop over a 12-month period. Many stocks have seen shares fall due to the macroeconomic headwinds caused by inflation. In addition to this, the geopolitical events in Ukraine, which caused a stock market correction, have not helped either.

UK shares have risks

Despite buying Centamin shares for my holdings, I must note tangible risks that could impact any returns I hope to make. Firstly, central banks are taking steps to reduce inflation and one of those steps is to increase interest rates. If the US dollar rises as a result, then the value and demand for gold could fall. This would result in gold stocks such as Centamin suffering.

Next, Centamin is at the mercy of the soaring cost of raw materials and the supply chain crisis. Its production costs are quite high already, so this bump in costs and disruption could drive these costs up further. This could impact the company’s returns.

Why I purchased Centamin shares

So to the positives. Firstly, at current levels, Centamin shares look good value for money to me on a price-to-earnings ratio of just 10.

Next, the shares would boost my passive income stream through dividend payments. I can see Centamin shares currently offer a dividend yield of over 7% currently. This is higher than the FTSE 250 and FTSE 100 average yields respectively. I am aware that dividends can be cancelled at the discretion of the business at any time, however.

I noticed that Centamin has a consistent record of performance too with revenue and profit growth achieved consistently in the past four years. This performance helps drive growth and underpins shareholder returns.

Finally, one aspect I really like about Centamin is the fact it has no debt on its balance sheet. This is vital for me. Debt needs repaying, so not having any leaves more cash for growth and returns. This sounds too good to miss for an investor like myself.

Overall I do understand commodities are volatile but with the rewards far outweighing the risks currently, I decided to buy Centamin shares. Furthermore, there doesn’t seem to be a light at the end of the tunnel for the current economic uncertainty and soaring inflation. Due to this, I think diversifying my holdings by adding stocks like Centamin could be a shrewd move.

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.

Jabran Khan owns shares in Centamin. 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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