On Thursday morning (21 June), we get the latest UK inflation figure, expected to be 8.4%. This would mark another drop from last month. It would finally give us two consecutive readings below 10% for the first time since June 2022! Granted, inflation remains high, which is why investors (including myself) can make use of high-yield dividend stocks that are paying out income.
Why inflation is tricky to beat
Trying to beat inflation using dividend stocks isn’t as simple as it first might appear. On the face of it, if an investors buys a stock with a 9% dividend yield and inflation is at 7%, they might conclude they’re net up by 2%.
Technically this is true, but only for that moment in time. Over the next year, both the dividend yield and inflation rate will change. For example, if the company reduces the dividend per share payment, the yield could fall. Or the inflation rate could be higher or lower by the end of the year, changing the perspective again. The current forecast is for it to hit 5% by year end.
So although I can’t say for sure that inflation can be beaten, I can at least say there are stocks that can significantly limit the impact of future inflation.
Ideas to consider
To be in the running for high-yield status, a yield needs to be above the FTSE 100 or FTSE 250 index average. Ideally, I want it to be above the expected 5% inflation end-of-year forecast.
Close Brothers is a UK bank that focuses on serving corporate and institutional clients. The current yield is 7.04%, with it being above 6% for virtually all of the past year. I feel it will be able to support further dividend payments going forward. As mentioned in the latest trading update, this is thanks to the “loan book growth accelerating, a strong net interest margin and stable credit performance.”
ITV is a household name, yet the TV broadcaster is seeing good growth outside of the UK, namely America. This is via ITV Studios, which focuses on producing content globally. The dividend yield is 7.08%. I recently wrote about the dividend forecast for the next two years, where it’s set to increase from 5p in 2023 to 7p in 2025.
More above-average payers
Aviva is a life insurance and investment manager. Thanks to a 35% rise in operating profits last year, I believe continued dividend payments won’t be a problem. The current yield is 7.83%. With the share price only down 3% over the past year, the high yield mostly comes from the large dividend per share. However, investors need to be wary of the impact a stock market crash could have on people pulling funds out of the company.
All of these stocks come with the risk that they might underperform. That could drive their share prices down, meaning I could lose out even with a high yield.
But Taylor Wimpey is the highest-risk option here. The homebuilder stock’s down 8.5% in a year. The problems around property stocks are well documented. Yet the lower share price has boosted the yield that’s now at 8.55%. If this is being held for the long term when the property cycle returns to growth, it could be a smart addition right now.
