7.2% dividend yield! A penny stock I’d buy for 2022

The problem of soaring inflation looks set to reign well into 2022. In recent hours. Jerome Powell, head of The Federal Reserve, said the bank intends to stop using the term “transitory” when referring to the trend of rampant price rises. It suggests that Powell now expects extreme inflationary pressures to last longer than previously thought.

This perhaps isn’t much of a surprise. Inflation readings in major economies across North America, Asia and Europe are now sitting at multi-year highs. Some of the supply chain issues that have caused prices to rocket appear no closer to being resolved either.

It’s no wonder that gold prices are steadily strengthening following extreme weakness earlier in 2021 — surging inflation boosts demand for non-paper currencies such as precious metals. Yellow metal prices are building a base around $1,800 per ounce and could be poised to strike higher. In a recent interview with Arabian News, Barclays‘ chief market strategist Gerald Moser suggested gold values might rise as much as 20% over the next year.

Buying the gold producers

The prospect of strong and sustained price increases isn’t the only reason I’d seek to get exposure to gold today. The enduring Covid-19 emergency, swift economic cooling in China, and the prospect of fresh trade wars between major nations could also spook investors into buying safe-haven precious metals.

I wouldn’t load up on gold coins or bars however. Nor would I invest in something like the Goldman Sachs Physical Gold ETF. Owning physical gold, or a financial instrument like an exchange traded fund (ETF) that’s backed by the metal, is a good way to make money when the commodity price goes up. But it doesn’t let investors generate income from the assets they hold.

This is why I’d rather have exposure to the companies that pull the yellow metal itself out of the ground. One way I can do this is by investing in an ETF which holds shares in gold companies, like Sprott Junior Gold Miners ETF. Another way is to go shopping on the London Stock Exchange for specific shares to buy.

A top penny stock on my watchlist

This is the route I’m looking to pursue. It would allow me to receive dividends in addition to riding any gold price gains. Buying individual mining stocks or ETFs which own gold companies expose investors to the business of digging for the metals themselves. This can prove problematic for profits as production issues that hit revenues and drive up costs can be commonplace.

Still, I think the possibility of receiving juicy dividends makes up for this extra risk. And some UK gold-producing shares offer some jaw-dropping yields right now. Centamin is a mining company I’m considering buying for this very reason. Its yields for 2021 and 2022 sit at a gigantic 7.2% and 5.3% respectively.

I like this particular penny stock too because of work it’s undertaking to turbocharge production levels and bring down costs. Centamin is looking to produce up to 500,000 ounces of gold a year by the middle of the decade. I think the business could prove a lucrative UK share to buy in the near term and beyond.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.