How to beat inflation

For the past decade there has been a simple answer to how to reliably beat inflation: put your money in an equity income investment trust.

They may not perform exceptionally well, but investment trusts dedicated to dividends have provided a comfortable and solid baseline for at least matching consumer prices inflation.

The yield on the average UK equity income investment trust has tended to consistently beat inflation – and if you picked the higher yielding trusts or headed overseas for dividends, you could get CPI and then some. That stands in stark contrast to savings accounts, which have on regular occasion paid less than inflation – losing savers’ money in real terms.

The added advantage for investors was that on top of any dividend pay-outs, they also had the opportunity for capital growth from the share price return. The most important measure of an investment is not just yield, it is total return – the combination of dividends and growth – but a well-maintained, solid and reserve-backed investment trust dividend provides a nice reliable baseline to put some faith in for at least a portion of your portfolio.

Even if you had managed just average performance from the Association of Investment Companies’ UK equity income sector, over the past five years you would have reaped a total return of 41.5% and over the past decade it would have been 140%. This is equivalent to roughly 7% and 9% annually, respectively. That is certainly more than a savings account would have paid, which you would expect as investing in shares involves taking a greater degree of risk.

But bear in mind the UK stock market has been lacklustre compared to others – and those periods include the full-on Covid crash – and that is not bad. There is a bit of a problem now though. Consumer prices inflation was revealed last week to have hit 4.2% and is expected to keep climbing whereas, according to the AIC, the average UK equity income trust yields 3.7%.

Even these reliable investment vehicles no longer have a pay-out that matches inflation. There are, though, investment trust income sectors where reliable dividends can be found – going global is often good and Asia is regularly tipped – and investors should always avoid too much home bias.

But what is interesting about the UK income trusts is that they are invested in what is considered a still largely unloved market, but one that analysts suggest is relatively cheap and could be lined up for better times. Last week, it emerged that JP Morgan’s analysts had changed their tune and switched from being bearish and then neutral, to advising clients to buy UK stocks. Of course, a rerating for UK shares might not arrive; if it does it will not be a one-way street, and there might still be better investments elsewhere.

But at a time when inflation is eating away at our savings more rapidly than it has done for a decade, the triple opportunity of a reliable dividend, from a potentially undervalued part of the global stock market, which is conveniently close to home could be worth considering

As ever, if you have any questions, please contact your financial planner.

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Sources: Techlink