UK inflation climbed to 3.8% in July — the highest level since January 2024 — and there’s a chance it could go even higher. For this reason, I’ve been looking for dividend shares that investors may wish to consider buying.
It’s not just because these businesses pay passive income. It’s also because the sectors in which they operate have tended to fare better than most when prices are rising.
Steady demand
An investment in Tesco (LSE: TSCO) isn’t free of risk. A massive market share doesn’t change the fact that it will always face strong competition for shoppers’ cash, particularly from German discounters Aldi and Lidl.
Getting exposure to the stock today would also require someone to pay the equivalent of 15 times earnings. That’s not much more than the average valuation in the UK stock market. But it’s rather expensive among Consumer Defensive stocks and compared to listed rivals like Sainsbury.
Still, I reckon this business is worth a closer look. Regardless of where inflation is going, it’s hard to get away from the fact that we’ll still need to eat. Tesco can also use Clubcard pricing as a way of keeping people loyal.
The forecast dividend yield of 3.2% looks set to be easily covered by expected profit, even if it’s far from the highest in the FTSE 100 index. This last point brings me to another potential option for generating a second income.
Monster dividend yield
One way of boosting the average yield within a portfolio is to own shares in insurance and retirement specialist Legal & General (LSE: LGEN). The yield here stands at a stonking 8.4%. That’s way over double July’s inflation reading.
A firm like this might be a decent hedge because it can easily reprice its policies to take account of rising prices. This brings in more revenue, which helps to offset higher costs.
Another attraction from an income perspective is the fact that it’s got a great track record of raising the amount of cash it returns to investors year after year.
All that said, Legal & General’s heavy exposure to the UK could come back to bite it if the economy weakens further. So, it’s worth remembering that dividends are never guaranteed.
Cheap passive income
For even more diversification, I reckon GSK (LSE: GSK) warrants consideration. While it shares many of the same defensive properties as Tesco — such as stable demand — the pharmaceutical giant also generates sales from around the world. The latter arguably gives investors an extra layer of protection in the event of UK inflation outpacing that of other economies.
Here, the dividend yield stands at 4.5%. The shares look seriously cheap too, trading at a little less than nine times earnings.
One reason for the low price tag is because the industry is currently facing tariff-related headwinds. On top of this, US Health Secretary Robert F Kennedy Jr is a known critic of vaccines — GSK’s ‘bread and butter’.
Personally, I’m not concerned by temporary political shenanigans. We favour taking a long-term view of any investment at Fool UK. What’s arguably more important is that the company’s treatment pipeline continues to bear fruit.
And with AI now being employed by the £60bn cap to aid drug discovery, GSK’s outlook may actually be better than the performance of its share price suggests.
