Inflation is coming. Here's how you can protect yourself

The Motley Fool
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Public Domain

We're nearly four months on from the Brexit vote and so far, the UK economy isn't showing any ill effects from the result. But this won't last. Since the end of June, the value of sterling has collapsed by 20% and this depreciation is almost certain to have an impact on the country's economy.

Weaker sterling will mean higher prices for consumers, and as Tesco's spat with Unilever last week showed, the upcoming price war between suppliers, consumers and retailers won't be pretty. But whatever companies do to offset inflation, as a major importer of goods and services, the UK almost certainly faces higher prices following the plunge in the value of the pound.

Bad news for savers

Rising prices will push inflation up and this is bad news for the UK's savers. According to a study published today by the EY ITEM Club, inflation -- which has been below 1% for nearly two years -- could hit 2.6% during 2017. Other research indicates it could hit 3% or more during the next few months.

Economists believe that some inflation is generally good for economies, it can signal improving household finances and a rising demand for goods and services. However, for an economy that's struggling to grow, inflation driven by higher prices can be disastrous as it erodes purchasing power.

Indeed, with interest rates at 0.25% and an inflation rate of 3% it implies that savers are receiving a real interest rate -- the rate of return after deducting inflation -- of -2.75% per annum. If inflation remains high for an extended period, it can decimate savings. However, by investing in shares, you can protect your wealth.

Can stocks save the day?

Plenty of shares trading in London today support a dividend yield of 3% or more. Some yield as much as 6%. These 6% yielders are exactly what investors need to protect their wealth from the scrouge of inflation. Even if inflation hits 3%, a yield of 6% indicates a real dividend yield of 3%. What's more, most companies look to increase their payouts on an annual basis, which should keep the dividend payment growing at or above the rate of inflation.

Some companies such as SSE state specifically that they're looking to increase dividend payouts in line with inflation. Management has made it clear that the group operates towards the achievement of a clearly-stated financial goal of "annual dividend increases that at least keep pace with RPI inflation." The company's shares currently yield 5.8%.

Investors will also benefit from a natural uplift in the dividend payout of any company that pays dividends in US dollars. Take HSBC for example, last year the company paid out $0.51 per share to investors by way of a dividend. At last year's exchange rate this payout was worth about 34p but at current exchange rates the payout is worth 42p, an uplift of 24%. This payout hike is only a one-off but does present a compelling opportunity for investors looking to cash in on sterling's declines. Shares in HSBC currently support a dividend yield of 6.8%.

A better pick?

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.