Investing

Forget safe-haven gold. FTSE 100 dividend stocks are my inflation hedge

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FTSE 100 dividend stocks are in demand right now, as investors prize value over growth. The index of top UK blue chips is down just 5.54% this year, whereas the growth heavy S&P 500 has fallen 21.61% (and the Nasdaq even further).

At times like these, when investors are nervous and shunning risk, I would normally expect the gold price to rocket. That’s its traditional role, and why investors hold it in their portfolios.

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Gold is a non-correlating asset. The price typically rises when share prices fall, and vice versa. Having some exposure helps smooth the ups and downs of investing. Yet so far this year, gold isn’t doing its job.

Gold price has lost its lustre

The precious metal started 2022 trading at $1,829 an ounce. After spiking to $2,043 in the early days of the Ukraine war, it has retreated to $1,834, almost where it started. Measured over the last 12 months, it is up just 3.44%. 

Gold has been seen as a store of value for more than 4,000 years, so why isn’t it shining today? The US is in a bear market, after all.

One reason is that the US dollar is strong. Gold is priced in dollars, and is now relatively more expensive to overseas buyers.

But the main reason is inflation. Gold does not pay any income, which makes it a poor hedge against rising prices. Especially as the yields on rival safe havens, cash and bonds, are finally starting to rise.

Income-generating investments are a good way of helping keeping up with rising prices, but personally, I favour UK dividend stocks over bonds and cash. That’s because they offer the prospect of a high and rising income, plus capital growth on top.

The FTSE 100 is forecast to yield 4.1% this year, according to AJ Bell, and some stocks now deliver a lot more income than that.

Housebuilder Persimmon currently yields a staggering 13% a year, the highest on the index. Mining giant Rio Tinto isn’t far behind, yielding 12.87%.

Asset manager M&G, insurer Aviva, and mining giant Antofagasta all yield around 9.35%. A quick search will reveal plenty more FTSE 100 dividend stocks yielding between 6% and 8% a year, which are incredible rates of income, in my eyes.

These dividend stocks offer amazing yields

Super-high yields like these can be a sign that something is wrong with the underlying business. Yet the five companies I have listed here look solid enough. None look like they are going to go bust any time soon, although of course you never know.

Their high yields mostly seems to be a consequence of today’s wider uncertainty, rather than individual company stress. 

Naturally, dividends are not guaranteed. They should increase if company profits rise, but could be cut if they fall. As we saw during the pandemic, shareholder payouts can be suspended. Companies can also go out of business. 

Yet in my view these are risks worth taking, because over the longer run, my total return from FTSE 100 income stocks should outshine gold, cash, and bonds.

This does not mean I would shun those asset classes altogether. They have a place in a balanced portfolio.

But as inflation rages out of control, I reckon UK dividend stocks offer me a much better way to fight back.


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