With double-digit yields, Rio Tinto and Persimmon shares could help investors generate passive income to protect themselves and their money from rising inflation.
A synergistic cocktail of inflationary pressures saw UK Consumer Prices Index (CPI) inflation increase to 6.2% last month, up from 5.5% in January. According to the Office for National Statistics, this is ‘the largest monthly CPI increase between January and February since 2009.’
The UK supply chain, already suffering from the twin effects of Brexit and the covid-19 pandemic, is once again being hit by Russia’s war in Ukraine.
The Office for Budget Responsibility (OBR) is predicting inflation could hit 8.7% by the end of the year, while also warning that the public tax burden is rising to 36% of GDP, its highest since the aftermath of World War II. Accordingly, British citizens are about to see the biggest drop in living standards since the Suez Canal Crisis.
Chancellor Rishi Sunak has attempted to alleviate the immediate crisis with his Spring Statement. Fuel duty is being cut by 5p, while his shake-up of National Insurance rules is likely to benefit workers earning under £40,000pa.
However, these measures are not going to prevent investors or their money from rocketing inflation. But these FTSE 100 dividend stocks currently generate returns on cash faster than it is inflated away.
FTSE 100 dividend stocks
Rio Tinto (LON: RIO) shares are worth 5,816p right now, with the UK-Australian dual-listed company currently boasting an inflation-busting 10.48% dividend yield.
As the second-largest miner in the world, it produces iron ore, diamonds, gold, copper and uranium. And working across 35 countries, the miner is geopolitically safer than most. In addition, institutions own more than half of all shares, making it a relatively safe FTSE 100 dividend stock pick.
Moreover, demand for its metals is soaring as the mining supercycle continues. Exports from Ukrainian-based iron ore miner Ferrexpo have all but ceased. Inflationary hedge Gold is at record highs. And demand for uranium is soaring as countries worldwide renew their nuclear energy efforts in the face of volatile Brent Crude oil prices.
In full-year results, CEO Jakob Stausholm boasted of ‘record financial results with free cash flow of $17.7 billion and underlying earnings of $21.4 billion.’ And it paid out its ‘highest total dividend ever of 1,040 US cents per share, including a 247 US cents per share special dividend, representing a 79% payout.’ This $16.8 billion investor return was the second largest in FTSE 100 history.
Persimmon (LON: PSN) shares are worth 2,227p each, after falling from 3,210p in mid-April last year. But with a 10.29% dividend yield, it remains the largest housebuilder in the FTSE 100.
The company is comprised of 31 regional operating businesses that build houses in ‘over 250 prime locations across the UK.’ 2021 was a good year to be in real estate, with the average UK house price increasing by 10.8% to a record £275,000.
Moreover, the OBR has doubled its 2022 forecasted growth, and now believes properties will rise a further 7.4% by £20,350 to £296,350 in 2022.
Of course, this market is highly cyclical. Rocketing prices have historically been followed by sharp corrections — most recently in 2008 and 1992. Capital Economics Chief Economist Paul Dales thinks the bank rate ‘will be increased to 1.00% in May and will reach 2.00% next year.’
And as interest rates rise amid the cost-of-living squeeze, Halifax is predicting only 1% price growth this year. But with supply far outpacing demand, and a government whose voter base is composed predominantly of homeowners, a major correction may still be some way off.
In full-year results, Persimmon saw ‘strong demand through the year,’ with ‘average private weekly sales rate being c. 9% higher than 2020, a year significantly impacted by pent up demand brought about by the pandemic, and c. 22% ahead of 2019.’
And it saw strong net cash generation of £1.21 billion on 14,551 home completions, nearly a thousand more than the year before. In addition, it spent £460 million on 20,750 plots of land in 2021, bringing its total landholding to 88,043 plots.
Moreover, with an underlying pre-tax profit last year of £973 million and £1.25 billion in cash, the FTSE 100 dividend stock has the resources for further pay-outs.
Rio Tinto and Persimmon are two FTSE 100 dividend stocks with the financial firepower to tackle inflation head-on.
Of course, both are highly cyclical businesses. Dividends are never guaranteed.
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