Gold is often touted as the must-have inflation hedge, but I'd argue S&P/ASX 200 Index (ASX: XJO) dividend shares can provide just as much – if not more – protection against the cash-eating measure.
Inflation is the name given to the rising cost of goods and services. It's been particularly noticeable recently – the Australian Consumer Price Index (CPI) rose 6.9% over the year to October.
Here's why I believe some Aussie stocks can provide better protection for investors than the yellow metal offers.
But first, what is an inflation hedge?
An inflation hedge is an asset able to provide returns faster than inflation can erode the value of money.
That's particularly important for investors to keep in mind. Those who ignore the measure may find themselves yielding a return but ultimately going financially backwards.
For instance, a share returning 5% over the year to October might well have beat the ASX 200 in that time. However, its 'real value' actually would have fallen as inflation ate away at the Aussie dollar's purchasing power.
Inflation hedges are assets that are either immune from inflation or can provide returns greater than the measure, thereby protecting their owners' cash.
ASX 200 dividend shares as inflation protection
Gold is often thought to be immune from inflation. But I think ASX 200 dividend shares represent better protection. That's because they can offer both capital gains and passive income.
While no investment can be guaranteed to gain in value, the ASX 200 has provided annualised returns, including dividends, of 8.66% over the 10 years to the end of December, according to S&P Dow Jones Indices data.
Such returns would certainly see an investor fending off inflation. Particularly if they reinvested their dividends to take advantage of compounding.
Additionally, ASX 200 dividend shares can – in some instances – also provide a level of immunity from the cash-eating measure.
Take Transurban Group (ASX: TCL), for example. The toll road operator's revenue is directly linked to the CPI, thereby offering protection against inflation.
Computershare Limited (ASX: CPU)'s bottom line can also be positively impacted by the major bane of inflation – higher interest rates.
And of course, bank shares can also get a boost from interest rate hikes.
