Opt for equities to beat inflation

Dividend-paying stocks can act as a hedge against rising prices.

Emma Wall 17 February, 2017 | 6:00PM



Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm here at Invesco Perpetual in London to talk to Chief Investment Officer Nick Mustoe about rising inflation. Hello, Nick.

Nick Mustoe: Hello.

Wall: We've heard this week the new inflation figures: 1.8% in the UK, not as high as expected, but still higher than it was. Should investors be worried?

Mustoe: I think inflation is one of those risks that's out there for the medium term. I'm not sure whether the short term will actually play out with a much, much higher rate, but I think we're going to see gradually rising inflation over the rest of this year. We've had currency weaken, we've had rising commodity prices; I think that stores up an inflation increase.

Wall: This week we are focusing on income. How does inflation affect income assets?

Mustoe: Well, inflation is always the bogeyman for income assets. If you're looking at fixed income, by definition, you see a fixed return in terms of your cash flow. Inflation eats into that return. And so it's very, very important to find assets that will actually hedge against that inflation rise.

Wall: And indeed, for equities that have dividends or pay dividends, it means you are getting less of a real return if inflation rises.

Mustoe: It can do. The real trick is to find companies that are going to grow their dividends over time. Therefore, in a rising inflationary environment, they have the ability to actually increase their profitability, and hence their dividends are thereby giving you a very good hedge.

Wall: And that was going to be my next question. How do investors protect themselves from rising inflation? Because if it's going to continue to tick up, this is something we need to consider when constructing a portfolio.

Mustoe: Yeah, I think it's very important. I think we've had the last five or six years with very, very low inflation, in fact, deflation around the world, and I think it's a new sort of challenge for investors to find a way to actually protect themselves from it. I think investing in equities gives you a very good ability to do that.

Wall: Nick, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.

About Author

Emma Wall  Emma Wall is former senior editor for Morningstar.co.uk.