Even though inflation in the UK is falling, it has remained above 10% for the past three months. As such, it’s a pest that’s eroding the value of my cash.
One way I’m trying to counterbalance this is by making a second income from dividend shares. This return can help to offset the impact of high inflation for the rest of the year and beyond. Here’s how I’m doing it.
Ignoring growth, focusing on income
The top stocks I’m focusing on are the ones that pay dividend income. For this strategy, I’m ignoring growth stocks. This is because these type of companies usually reinvest all profits back into the business to fuel further growth. It leaves little or no cash to be paid out to investors.
On the other hand, more mature companies that have reached scale often use attractive dividends as a way to lure investors. Profits can be more stable and, over time, a track record of payment history can be built up. Granted, dividends aren’t guaranteed, but this is an unavoidable risk.
Finally, there is an overlap whereby I can find stocks that pay out some form of income but are also growing. I’m not too keen on this type of area right now. As I’m trying to offset high inflation, I want to really focus on maximising dividend potential and not sit on the fence.
Stocks with suitable yields
I like the sweet spot found with dividend yields between 5% and 7.5%. This area interests me because it’s above the FTSE 100 average yield of 3.61%. Yet it contains a wide selection of companies (13) that fit the bill. As such, I can invest in a mix of stocks from different sectors to diversify my overall portfolio.
The obvious question here is why invest to get this yield when inflation is around 10%? Shouldn’t I buy Persimmon with a 16% yield or Ferrexpo with a 15% yield? This could generate me a net positive return this year.
One concern I have with these ultra-high-yield stocks is that it isn’t sustainable. For example, Ferrexpo yield has risen in part due to the share price falling by 47% over the past year. I think the dividend could be reduced, hence why I’m staying away.
Further, inflation is expected to fall to around 5% by the end of this year. Admittedly, these are just forecasts. But if it’s correct, my target yield will be enough to help make me a real profit.
Making my money work
My second income derived from the dividends this year can be used in different ways. I’ll want to reinvest most of it, to aid compounding of gains going forward. If I take the dividends and hold it in cash, I’ll again lose out to inflation. However, the income gives me the flexibility to either spend the funds or invest again, a valuable advantage.
