With the inflation rate reaching 2.7% last month, it is becoming increasingly challenging for investors to generate a real-terms income return. Looking ahead, the rate of inflation is forecast to move higher. An uncertain period for the UK in a political sense could cause a further weakening of the pound. This, in turn, may lead to higher import prices which are then passed on to consumers in the form of higher inflation.
Given this backdrop, buying higher-yielding shares could be a shrewd move. Here are two stocks which could be worthwhile income plays.
Reporting on Tuesday was owner and operator of student accommodation across the UK, Empiric(LSE: ESP). The company's trading update showed that it is making solid progress with its current strategy. Its net asset value (NAV) per share increased to almost 108p from just under 106p as at 31 December 2016. This puts the company's shares on a price-to-book (P/B) ratio of just over one, which indicates that they offer excellent value for money.
The company's development pipeline is on track. It is anticipating an annual rental uplift for the 2017/18 academic year of around 2.8%, which is likely to be a similar level to inflation. Its property portfolio has been valued upwards versus its December 2016 level. It now stands at £786.7m compared to £721.3m at the end of last year.
Looking ahead, Empiric is aiming to deliver a dividend per share of 6.1p for the full year. This puts its shares on a dividend yield of 5.5%, which is more than twice the current rate of inflation. As such, they could offer a strong income return, as well as the scope for capital gains.
While the prospects for the UK property sector have deteriorated, the buying opportunity for long-term investors may have improved. For example, Berkeley Group(LSE: BKG) continues to trade on a low valuation with a relatively high yield. Certainly, the prospects for the prime property market have worsened in recent months. The potential exodus of financial professionals and the uncertainty brought about by Brexit may lead to lower demand for prime property, but weaker sterling could help to offset this somewhat by encouraging foreign buyers to invest.
With Berkeley now trading on a price-to-earnings (P/E) ratio of 7.3, it appears to offer a wide margin of safety. Its dividend yield stands at over 6%, and yet is covered more than twice by profit. This suggests its future dividend payments are highly affordable and could provide an inflation-beating income stream for the company's investors over a sustained period.
Although UK house prices may fall and this may lead to some share price volatility in the near term, Berkeley appears to offer a mix of value and income potential for the long run. As such, even after a 12% rise since the start of the year, its share price could move higher.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.