Inflation hits 10.4%! Here’s how I’m using passive income to fight back

Last month, inflation reached 10.1%. Yesterday, the latest figure was predicted to be 9.9%, but unexpectedly rose to 10.4%. This is not good news for me or anyone in the UK, as inflation erodes the value of the money in my cash account.

One way I combat this negative pressure is by investing in dividend stocks to create passive income. That’s what I’m talking about.

Know how to account for inflation

At a basic level, let’s say I bought a share today at 100p. Every quarter, it pays a 1p dividend. Over the next year, I will earn 4p, which corresponds to a 4% dividend yield. If next year’s inflation averages 4%, I will effectively eliminate the impact of inflation. I still have the initial capital, but the 4% income helps offset inflation.

I know that this concept is more complicated in real life. For example, my money does not fall in real value. Especially if I have less money to buy because the price of goods is increasing. So it is difficult to see inflation clearly.

Another point I have to be careful about is trying to beat inflation over time. I hope to earn passive income for many years. So just because inflation is at 10.4% today, what should be the target for the next few years? What if it drops to 5% by the end of the year?

Therefore, I need to choose a reasonable average level that I want to try and reach.

Implement ideas

My starting point is to determine what kind of average dividend yield you want. I will not chase 10.4% returns. I can’t build a diversified stock portfolio with these numbers. I also don’t think inflation will stay high for long. Therefore, I would like to target a return of between 6% and 7% over the next few years. From my calculations, this should be enough to offset inflation over the period.

Thankfully, there are plenty of stocks that fit the bill for some of these results. Even in the FTSE 100 alone, there are currently 14 stocks with a minimum yield of 6%.

Ideally, I would like to pick up for twelve shares of FTSE 100 and FTSE 250. Since I want sustainable income, I prefer to stick with larger stocks in this case.

I am not too fussed about the amount of money I invest. I will not put in all free cash, as this may cause me problems in the future if I have emergency cash needs. However, I prefer to invest what I have now, and then look for this amount every month or every month with extra money.

By putting all of this together, I think I can make money harder for me in the difficult year ahead.