Inflation. It is in the headlines, your local shop, your costa coffee, your work lunch, your energy bills, your date nights - it is making financial life for most people pretty miserable, and with the highest rise in the cost of living for 40 years, it is understandable. But if you cannot beat them, join them, thus, I am on the lookout for investment options for my portfolio that can benefit from the rising prices.

The financial markets are in turmoil currently, partly as a result of the challenging economic conditions, so my ISA value relative to this time last year is not a welcome sight. 

Why investors are worried

With inflation expected to continue rising, income investors like me are worried. Particularly as the FTSE 100’s yield is only 3.73% currently. To put this into context, the maximum dividend yield of the FTSE 100 index over the last 20 years was back in 2020. At one point during that year, it was at 7%, which would have at least been commensurate with the current level of inflation investors are faced with today.

Consumer price rises, currently at 9% compared to the same point last year, are expected to trend even higher this year. So, with persistent price rises looking like the medium-term norm, where can I turn to find investments that may provide an inflation-protected income, or growth, in the meantime?

Three places to consider investing

I would not normally invest in single stocks. But considering my portfolio is well-diversified, across assets, sectors and regions, mainly through a range of open-ended funds and investment trusts, a tactical move is justified considering the current market challenges. 

Imperial Brands (LSE:IMB) is a good place to start. Tobacco stocks are cheap, and the British cigarette maker is one of the cheapest. The stock trades around 6.8 times projected 2022 earnings, significantly lower than the sector average of 11.4 times. It is also one of the highest yielding income stocks in the FTSE 100 currently, at 9%. 

Alternatively, Phoenix Group (LSE:PHNX) is a stock with a yield in line with inflation, with additional growth potential. Its shares are now yielding over 8%. As interest rates rise, an insurance company’s liabilities (in the form of life policies) decline. In addition to this, the company is now writing more new business than the decline in its legacy business, so it is likely that the current dividend has the potential to grow from here.

These are two relatively high-income-producing stocks, which perform as well, or if not, better, in a high-inflation environment. As an income-focused investor, I ideally need returns yielding real returns above inflation. These stocks have the potential to provide this for me in the medium to long term. 

Finally, core infrastructure stocks are another option that offers better inflation protection qualities than the wider stock market. Research and index providers, LPX AG, ran the numbers to prove this (up until May 2022). Core infrastructure stocks, as measured by the NMX Infrastructure Composite, have returned  9.9% per year since 1999. Seven percentage points more than the average inflation rate. It dwarfs the performance of the MSCI (6.6% per annum). The data shows that these stocks (as measured by the index) perform even better when inflation edges higher. For example, when the average inflation rate is above three per cent, the average excess return of infrastructure stocks over the MSCI World is 8.1 percentage points. 

Final thoughts

There are no guarantees here, but these are the types of businesses and assets that seem more capable of defending against the effects of inflation than others. This is a key reason why I intend on buying these shares. Of course, all this is assuming that inflation will remain a problem and interest rates are going to rise on a sustained basis. Those are both possibilities but not certainties. 

Nevertheless, I am dependent on my portfolio income and believe inflation will continue to persist. This requires me to seek out undervalued stocks to add to my portfolio that still has the ability to pay out growing income despite the volatile market environment.

If the current climate persists, assets that yield real returns (an investment return above inflation) will be vital to me maintaining my income and capital growth objectives. 

About the author: Henry Adefope is an Associate Director at global communications and advocacy firm, SEC Newgate UK, and an investment commentator. He directs communication activities for major investment brands across a host of strategies and asset classes. Clients have included Vanguard, State Street Global Advisors, BNP Paribas, Barings, and RBC Global Asset Management. He began his career at Goldman Sachs and Broadwalk Asset Management and is a Chartered MCSI member of the Chartered Institute for Securities & Investments, as well as a member of the CFA Society. 

Disclaimer: This article does not constitute financial advice. All investments are made at the reader’s own risk.