The data is in, and unfortunately higher inflation is here. Under normal circumstances, a small amount of inflation is considered good for an economy. But central banks aim to keep that rate at around 2% per year and right now, the consumer price index in the UK suggests that prices are rising at 5%+. That’s the highest seen since 2011. To protect the value of my savings, I need to invest in assets that will either generate a higher rate of income or appreciate in value.
But what options do I have? Some of the safest investments out there are 10-year government bonds. But the current interest rate on these bonds is just 1.4% so I’m not currently considering them.
Buying dividend stocks
Another option is to build a portfolio based on dividends. These payments are portions of a company’s profits paid to investors over the course of the year. Right now, several FTSE 100 companies are paying staggeringly high dividend yields: 8%, 10% or even 13%. Unfortunately, yields as high as these are often unsustainable over the long term. They won’t be worth much either if the share’s value goes down over time.
Yet I see some higher yields as being much safer. I would add tobacco company Imperial Brands to my portfolio. It pays an 8.5% dividend yield and has remained profitable while increasing revenue over recent years, even as its share price has fallen. IMB shares trade for 1,631p today, down 58% since 2017. There is a risk that the share price could continue to come down as smoking becomes less popular. But IMB has undertaken several cost-cutting measures over the past few years, including exiting all but its five most profitable markets. On top of that, IMB has consistently paid some form of dividend for more than 20 years, even through the pandemic.
I think, as a hedge against inflation, the benefits outweigh the risks for me.
But my portfolio needs diversification. For that, I’d focus on capital growth by investing in a company I think has great potential.
One great penny stock
Penny stocks are companies whose shares trade for less than £1. Most of these stocks don’t have much potential, but there are a few gems hidden among them. I think that one such gem is Idox group, a software engineering company based in the UK. Its shares currently trade for 67.97p, up 34% from this time last year. Right now, Idox builds software platforms for public sector institutions. Most recently it delivered a new data collection/collation system for a Scottish council. If it is able to leverage that success into deals across the country, I can only see the share price rising.
The biggest danger here is the company’s very thin profit margin. Idox is profitable at the moment, but there is a risk that it could fall into unprofitability once again.
Even so, I think the upside potential is worth the risk, and I would definitely add it to my portfolio.
James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.
