Earning passive income from dividend shares is nearly never a bad idea. But with the UK at risk of stagflation, now might be an especially good idea for investors to take a look at what’s on offer.
A combination of low economic growth, high inflation, and high unemployment might not be great for share prices. But I think dividend stocks might prove more resilient than most.
Beating stagflation?
Like the witches in Macbeth, or the ghosts of A Christmas Carol, bad things often come in threes. So it is with stagflation, with the aforementioned mix of sluggish growth, inflation, and elevated unemployment.
The latest fear for the UK is that this might be an unwelcome consequence of the Budget. A big part of this was increases to the National Living Wage and National Insurance contributions for employers.
The worry is this might deter investors (leading to low growth). At the same time, businesses could respond by raising prices (leading to inflation) and cutting jobs (leading to unemployment).
That’s not great, but investors can’t do much about this. What they can do however, is figure out which stocks to consider buying to protect themselves in such an environment.
Dividends
Shares in companies that can distribute cash to investors in the form of dividends can be attractive in a stagflationary environment. Especially if they can do so consistently.
I think real estate investment trusts (REITs) are a good example. These are firms that own properties and generate rental income by leasing them to tenants and distributing the cash to investors.
In general, REITs don’t participate much in a growing economy. That’s because tenants don’t suddenly decide to start paying more on their rent just because profits are rising.
The other side of that coin though, is that they don’t pay less when growth falters. And that can make REITs more resilient than other stocks when things are tougher.
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Supermarket Income REIT
One example is Supermarket Income REIT (LSE:SUPR). Right now, the stock has a dividend yield of almost 9%, so there’s a real return on offer for investors even if inflation does start to move higher.
On top of this, the firm’s leases include future increases linked to inflation, the vast majority of which are based on the Retail Price Index (RPI). So rising prices should result in higher rents – and dividends.
Around 75% of the company’s rent comes from Tesco and J Sainsbury. That’s a risk, since it means the business might not have the strongest hand when it comes to negotiating new leases.
It’s worth noting though, that less than 1% of the current leases expire in the next five years. So Supermarket Income REIT should have a decent way to run before it has to get into this issue.
Long-term investing
I’m not going to buy Supermarket Income REIT – or any stock – just because of what the economy might do in the next few months or years. But I do think it’s an important consideration.
One of the benefits of a diversified portfolio is it limits the effect of specific risks. Stagflation is one of these, so I think long-term investors can legitimately look for stocks that offer protection from this.
