Back in October last year, the Monetary Authority of Singapore (MAS) delivered good news for investors.
MAS expected a sustained economic recovery to occur this year as countries slowly reopen their borders.
But there was a catch.
Disrupted supply chains, along with a surge in demand for goods and services, have led to rising inflation.
November’s inflation of 3.8% exceeded economists’ expectation of a 3.4% price rise and was the highest in the last eight years.
Households are set to face rising prices on multiple fronts, ranging from food and electricity to transportation.
Meanwhile, the government has also hinted that the Goods and Services Tax (GST) may need to be raised soon from the current 7% to 9% to build up revenue to carry out social programmes.
Amid the price pressures, MAS expects overall inflation for this year to clock in between 1.5% to 2.5%.
Thankfully, as investors, we have an option to invest in stocks to either grow our passive income or capital to counter the effects of inflation.
A healthy yield
Most bank accounts currently yield dismal interest rates.
A check with DBS Group (SGX: D05) and OCBC Ltd (SGX: O39) showed that a typical savings account carries an interest rate of just 0.05% per annum.
Even the government-guaranteed Singapore Savings Bond (SSB) currently returns just 1.64% per annum if held over a decade.
It goes without saying that parking your money in either bank accounts or SSB is not going to enable you to beat inflation.
Instead, what you can do is to invest in the shares of both local banks.
Shares of DBS offer an annualised dividend yield of 3.7%, while OCBC’s shares provide a prospective dividend yield of 4.3% assuming the bank restores its final year dividend to 2019 levels.
These yields handily beat inflation while investors can be assured of a good night’s sleep knowing that they are invested in strong, blue-chip businesses.
Even REITs, well-known for being favourites with income-seeking investors, pay a decent yield.
Units of data centre-focused Keppel DC REIT (SGX: AJBU) provide an annualised distribution yield of 4.3% while units of logistics REIT Mapletree Logistics Trust (SGX: M44U) deliver an annualised distribution yield of 4.9%.
Both REITs sport reputable sponsors as well — Keppel Corporation Limited (SGX: BN4) for the former and Mapletree Investments Pte Ltd for the latter.
Another effective way to beat inflation is to invest in businesses or REITs that demonstrate a proven track record of dividend growth.
The key is to ensure that this flow of dividends increases at a pace that exceeds inflation.
By doing so, your stream of passive income can also more than keep pace with the rise in the prices of necessities.
Take Parkway Life REIT (SGX: C2PU) for instance.
From 2008 till 2020, its distribution per unit (DPU) has grown at an annual rate of 6% from S$0.0683 to S$0.1379.
Mapletree Industrial Trust (SGX: ME8U) has seen its DPU grow by 4.5% per annum from its fiscal year 2012 (FY2012) to FY2021.
Companies such as Nike (NYSE: NKE) have done even better, chalking up a 13% per annum increase in its quarterly dividend over the past decade.
Long-term capital appreciation
A third, and probably the most popular, method is to invest in growth companies over the long term.
The capital appreciation from the rise in their share prices will more than beat inflation.
Take Apple (NASDAQ: AAPL) and Starbucks (NASDAQ: SBUX) as examples.
The iPhone maker’s share price has risen more than five-fold from US$30 to US$173 in the past five years, for an annual increase of 42% per year.
The coffee chain’s shares have increased by a decent 11.7% per annum over the same period.
The point here is that parking your money in stocks with strong catalysts and sustained tailwinds can help you to increase your wealth.
The key is to have the patience and fortitude to hold on to your shares through good times and bad.
Get Smart: Take action to bear inflation
Inflation is an inevitable part of any economy and should not be feared.
What you need to do is to make your money work harder for you.
By investing in stocks that pay dividends, you stand a great chance of beating inflation.
Long-term capital appreciation from parking your money in growing companies will also help to grow your wealth and ensure you are ready for retirement.
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Disclaimer: Royston Yang owns shares of DBS Group, Keppel DC REIT, Mapletree Industrial Trust, Nike and Starbucks.