Are these the best dividend stocks to battle inflation?

Inflation is wreaking havoc on stock markets. This Fool picks out two dividend stocks he’d buy to ease the pain.

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Higher prices look like they’re here to stay. That makes dividend stocks even more attractive than they already were. While the payouts can’t be guaranteed, I stand a better chance of getting passive income by buying resilient companies — those able to pass on price increases to customers, or provide something so essential that earnings remain steady.

Here are two candidates from the FTSE 100 I think are great inflation-battlers.

Unilever

Suggesting that Unilever (LSE: ULVR) may be a top dividend stock sounds a bit odd. After all, the shares yield ‘only’ 3.5%. I could get (a lot) more by shopping around the FTSE 100.

But note that I’m talking about battling inflation here, not necessarily beating it. If I were concerned about the latter, I could buy only the biggest yielding shares out there. The only problem here is that these tend to be the companies most likely to cut their payouts because they’re unsustainable. Why buy a share for income if receiving that income is so hit and miss?

I don’t think that will be the case here. Unilever has been able to pass on prices increases to its customers because it sells the branded products people find so hard to give up, even in tricky economic times. A holiday abroad can be put on hold. But not having Marmite in the cupboards? Doesn’t bear thinking about.

Right now, Unilver shares change hands at a price-to-earnings (P/E) ratio of 19 times forecast earnings. That’s still below the 5-year average of 20. So I may just get some capital gains if/when markets bounce back to form. When combined with the dividend yield, this could beat inflation.

Obviously there are risks in all investing. Unilever’s sheer size (market-cap of £100bn) means it can’t be as nimble as competitors. The obsession with showcasing its politically correct credentials has also caused consternation among some investors and could force some to sell their holdings.

On balance, however, I remain positive about the stock and would happily buy it.

National Grid

It may be one of the dullest stocks in the FTSE 100 but gas and electricity supplier National Grid (LSE: NG) is another dividend ‘aristocrat’, in my view. Thanks to the predictability of its earnings, it’s got a long history of returning cash to its shareholders.

I can’t see this changing. Sky-high energy costs might push households to be more cautious on their energy usage but having no heating at all when the colder weather arrives simply isn’t an option for most of us.

The one danger with the stock right now in my view is that it’s overvalued. A P/E of 17 is still pretty reasonable, relative to the market as a whole, but it’s actually quite expensive for National Grid. A 25% share price gain in the last year means we could some profit taking from traders in due course.

Then again, I could be wrong. Current circumstances could see National Grid shares power above their record high achieved back in May.

Regardless of risk, I reckon a 4.8% yield is worth it. As long as I’m not complacent and remember to diversify, I’d buy as I see this as a great option for me as a way of fighting inflation.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. 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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