The scourge of inflation can be hugely damaging to your wealth, especially in today's low-interest rate world. In the past, when bouts of inflation have threatened the UK, policy makers at the Bank of England have increased interest rates in an attempt to cap inflation and its damaging effects. However, this time around the Bank of England is moving in the opposite direction.
Dividend stocks are now the investors' only hope to beat inflation. Luckily, there are plenty of high-quality potential dividend stocks out there to choose from. SSE(LSE: SSE) and National Grid(LSE: NG) are just two of the shares in the UK's high dividend universe, but they're also better positioned than most to ride out the impact of inflation on their businesses.
Biggest is best
SSE and National Grid are two of the UK's largest utility providers. National Grid manages the UK's electricity transportation network and SSE supplies services to customers on the ground. Both companies are highly regulated to ensure they're not ripping off customers, investors or other stakeholders and regulation prevents them from hiking prices at a rate much faster than the headline rate of inflation.
So, as inflation increases, SSE and National Grid will be able to push prices higher to offset any negative impacts of higher costs within their businesses. Ultimately, the net effect on the bottom line will be negligible, but these firms will benefit as they won't have to grapple with shrinking margins.
Another reason why SSE and National Grid are the perfect income stocks for an inflationary environment is their dividend policy. National Grid has such a long track record of paying inflation-linked dividends that it has come to be seen as a bond-like investment to many. Meanwhile, SSE intends to keep the RPI-linked dividend increases on track for the next three years.
The energy regulator also regulates how much cash these companies can return to investors via dividends. For National Grid, the company has already agreed with the regulator how much can be through dividends and allows long-term infrastructure investment until 2021, which gives both investors and the company's management plenty of clarity on the firm's long-term outlook. Shares in the enterprise currently support a dividend yield of 4.1%, and the payout is covered one-and-a-half times by earnings per share.
Unlike National Grid, which has a virtual monopoly over the UK's energy infrastructure, SSE is competing with other groups in the retail and business supply market. Customer churn is high as the regulator is encouraging customers to shop around for the best deals. For the year to the end of March, SSE lost 370,000 UK household customers.
For this reason, the company's dividend may not be as secure as that of National Grid. Nonetheless, as mentioned above, management has committed to RPI-linked dividend increases for the next three years, and the shares currently support a dividend yield of 5.7%. The payout is covered one-and-a-half times by earnings per share.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.