Rising inflation is wreaking havoc with stock markets, leading to declining valuations and increased volatility. The FTSE 100 is down 6% year to date as a consequence, falling over 3% yesterday on news that the Bank of England was raising interest rates to 1.25%.

Portfolio protection

In the UK, inflation reached 7.8% year-on-year for April 2022. The May figure is expected to be released by the ONS on 22 June and is predicted to be even higher. As a consequence, the Bank of England has raised interest rates to 1.25% with the aim of slowing down price growth. This is putting serious pressure on stock valuations as people can now achieve higher risk-free returns.

In order to protect my portfolio from this rising inflation, I am looking to build up positions in income stocks: low-risk, high dividend-paying companies. These types of stocks are perfect for today’s market as they provide stability amongst market-wide volatility, whilst simultaneously outpacing inflation with high dividends. With inflation at 7.8%, I am hunting for good value stocks that pay a yield surpassing this figure.

In addition to high dividends, I am looking for stocks in ‘defensive’ industries. These are industries that tend to perform well in times of market volatility.

Companies in these industries tend to pay consistent dividends and generate stable earnings regardless of the overall stock market. Examples of defensive industries include telecommunication, as telecom firms often have large amounts of pre-existing infrastructure and large customer bases, meaning they can control prices in line with inflation.

An income stock I have my eye on

A high-yielding stock that I currently have my eye on is Rio Tinto (LSE: RIO). It is a multinational mining company, which specialises in base metals. The stock has performed well so far in 2022, up 12% year to date.

Rio Tinto currently offers a juicy 10.6% dividend yield, protecting me against the eroding value of money. In addition to this, the shares currently trade on a very cheap looking 5.1 price-to-earnings (P/E) ratio. This is strides below the widely accepted P/E ‘value’ barometer of 10. Comparing this to another global miner and close competitor, Glencore, I see value. Glencore currently trades on a P/E ratio of 16.

In addition to this, inflation usually benefits commodity producers, as it increases the value of commodities like gold and silver. Therefore, a Rio Tinto position could be a good inflation hedge for my portfolio. Also, the ongoing war in Ukraine has led to concerns over the supply of steel. Rio Tinto mines iron ore, which is a key component of steel. With the supply shortage further driving up iron prices, Rio Tinto is well positioned for more growth.

Therefore, I think Rio Tinto could be one of the best income stocks to add to my portfolio in the current macroeconomic climate. It has a high dividend, is low risk, and has a cheap valuation. I am therefore looking at buying shares for my portfolio soon.

The post How I am using income stocks to combat rising inflation appeared first on The Twelfth Magpie.

More reading

• The only FTSE 100 stock I own right now

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has 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.

UK economy and housing

Lloyds is a British retail and commercial bank. It doesn’t operate overseas and doesn’t have an investment banking arm. This makes the firm heavily reliant on the UK economy. As my fellow Fool Roland Head pointed out, Lloyds is planning to enter the landlord market, building and renting out properties to the UK public. It’s already the UK’s largest mortgage lender so has experience in the housing market. And I expect the added revenue from rent to push up the Lloyds share price in the future. However, this move isn’t likely to provide an immediate boost for the bank.

Looking more broadly at the UK economy, it seems a rise in inflation could be on the horizon. Analysts from the National Institute of Economic and Social Research indicated that CPI could rise to 3.9% in early 2022. This is almost double the Bank of England’s target. If this is the case, we will likely see interest rate hikes, which could complement the Lloyds share price as banks will be able to charge higher rates for lending. Again, this factor is likely to be a longer-term benefit for the Lloyds share price, but the coming months may grant more clarity on CPI direction.

Inflation outlook

As Lloyds is so heavily reliant on the UK economy, it’s worth examining inflation forecasts further. In the US, Fed Chairman Jerome Powell has hinted he believes US inflation to be transitory. Most recent price gains have occurred in categories such as cars, flight tickets, and hotel rooms. This is to be expected as the economy reopens after the pandemic. Therefore, it could be rational to assume that any UK inflation concerns may also be short term, which may limit growth in the Lloyds share price beyond 2022.

That said, Michael Sanders of the Monetary Policy Committee (MPC) alluded to a tapering of Quantitative Easing (QE) in July. QE is the purchase of government bonds by banks to create new money in the economy. This signifies longer-term inflation for the UK economy, which could be good news for the Lloyds share price.

Lloyds share price: my verdict

I think the biggest factor for the Lloyds share price moving forward will be how inflation pans out. At the moment, there seems to be no clear-cut direction for future interest rates. I will be closely monitoring the MPC and Fed announcements over the next few months before considering purchasing any UK bank shares.

The post Where will the Lloyds share price move in the future? appeared first on The Twelfth Magpie.

More reading

• Is there any value left in Lloyds shares now they’re over £1?
• Prediction: this UK growth stock will outperform Lloyds shares over the next 5 years
• Barclays, NatWest or Lloyds shares: which is the better pick for a UK retirement portfolio?
• Here’s how much I think Lloyds shares will be worth by the end of 2027
• How to target a tax-free passive income of £1,275 a month on top of your State Pension

Dylan Hood has no position in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Here, I’ll explain why UK interest rates could hurt your wealth and your retirement. I’ll also look at what you can do to protect yourself from low interest rates.

UK interest rates: An alarming situation

If you’re saving for retirement, UK interest rates are a problem.

Currently, the best easy-access interest rate you’ll find is about 1.16%. Invest your money at that rate for the long term, and you’ll find that when you come to spend it, it buys you a whole lot less than you expect.

The reason? Inflation. This is the slow increase in the prices of goods and services over time. On average, it tends to be much higher than 1.16% in the long run.

Over 10 years or more, inflation can have a huge impact on prices. If you don’t protect yourself from it (i.e., earn a decent return on your savings), your money loses its purchasing power over time. 

If you’re building a nest egg for retirement, you need your money to be growing at a rate that is higher than inflation.

A nightmare for retirees

UK interest rates are also a problem if you’ve already reached retirement.

A little over a decade ago, you could park retirement savings in a high-interest bank account and pick up an interest rate of 5% or more.

If you had £250,000 saved, you could generate interest of £12k to £15k per year. Add that to your State Pension and you were looking at a relatively comfortable retirement.

Today, however, it’s a different story. Invest £250k at 1.16% and you’re looking at interest of less than £3k per year.

Add that to the full State Pension, and you’re looking at retirement income of about £12k. Realistically, that’s not enough to retire in comfort.

Protect yourself from low interest rates

Whether you’re approaching retirement, or already in retirement, the best way to protect yourself from low interest rates is to invest some of your savings. Invest your money properly, and you should generate a solid return on your money over time.

One of the best ways to invest money in the UK is through a Stocks and Shares ISA. This is a tax-efficient investment vehicle that enables you to invest in a wide range of assets. You can invest up to £20,000 per year and withdraw your money at any time.

The choice you have within this ISA is phenomenal.

For example, if your aim is to build wealth, you can invest in a fund such as Fundsmith. This is a global equity fund that has turned £50k into about £250k in less than a decade. Or, you can invest in individual stocks. This approach requires more work but the rewards can be greater. For example, had you invested $10,000 in Tesla shares a year ago, that money would now be worth over $60,000.

There are also plenty of options if your goal is to generate retirement income. For example, you can invest in income-focused investment trusts such as Murray Income Trust, which offers a yield of about 4.5%. Or, you can put together your own portfolio of dividend stocks.

Invest your money wisely, and low UK interest rates will no longer be a concern.

The post UK interest rates could hurt your savings and your retirement. Here’s what I’d do appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Edward Sheldon has a position in Fundsmith Equity. The Motley Fool UK owns shares of and has recommended Tesla. 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.