Yesterday, the latest inflation figures for the UK economy were released. It showed that in the past year through to January, the price of the basket of goods measured rose by 5.5%. This was slightly ahead of expectations of 5.4%. However, some City economists are forecasting inflation to continue to rise, peaking at 8% in April. With that in mind, here’s my stock investing game plan to try and ensure I generate a real return in coming years.
Understanding how inflation works
Firstly, I don’t need to panic in trying to find guaranteed ways to make at least 8% from stocks this year. At a basic level, there’s no guaranteed way to make such a return. Any investment in the stock market has some kind of risk involved. If I want a guaranteed return, I can find a high-interest cash account. But with the base rate currently at 0.5%, it’s not going to net me a real return.
The reason why I don’t need to overly panic is that inflation is calculated by looking at the shopping basket of goods measured a year ago versus present day. It’s not an indicator that is based on the future. The price rise has already happened. So what I should really be focusing on is future expectations of inflation when thinking about my stock investing plan.
Inflation could hit 8% in April, but in the latest Bank of England meeting, the committee decided it sees it returning back to the target level of 2% within the next couple of years. Therefore, I’m of the opinion that I want to try and find sustainable long-term investing options that can help me get a real return in coming years.
My stock investing plan
Based on the above, over the next year I expect the average rate of inflation to be around 4%. So this gives me a lower threshold with which to try and find good ideas to help me exceed this rate. My two favourite investing plans relate either to dividends or growth stocks.
For dividends, I can use the income payouts to counterbalance the inflation impact. For example, if I bought shares in homebuilder Taylor Wimpey that has a dividend yield of 5.4%, the dividends would provide me with this in annual income. Then if over the next year the average inflation rate is around 4%, I’d still have a positive real return after inflation.
An alternative stock investing plan would be to target high-growth stocks that could offer me share price appreciation. For example, over the past three years the Glencore share price has risen 43%. This works out an an average return of 14.3% per year. Clearly, past performance is no guarantee of future return. But if I thought these gains could continue in coming years, then the increase in value would offset the inflation impact. This would be tangible whenever I chose to sell the stock further down the line.
Jon Smith and The Motley Fool UK have 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.
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