3 UK Dividend Stocks to Buy Now for Inflation-Proof Income Growth

In an era of persistent inflation and economic uncertainty, income-focused investors are increasingly turning to defensive stocks that combine stable cash flows, above-inflation yields, and long-term value. Three UK equities—Tesco (TSCO.L), GlaxoSmithKline (GSK.L), and Legal & General (LGEN.L)—stand out as compelling candidates. These companies operate in sectors with inherent resilience—retail, healthcare, and insurance—and offer a mix of sustainable dividends, strategic reinvestment, and inflation-adjusted returns. For investors seeking to hedge against macroeconomic volatility while securing income growth, now is the time to act.

1. Tesco: The Defensive Retail Champion

Tesco's 3.4% dividend yield for 2025 may not dazzle, but its resilience in a high-inflation environment is unmatched. The UK's largest supermarket has navigated the cost-of-living crisis with disciplined cost management, maintaining a 1.5% dividend increase in 2025 and projecting an 8.6% rise in 2026. Analysts forecast a total shareholder yield of 8.8% (combining dividends and buybacks), supported by a £750 million share repurchase program.

The company's financial health is underpinned by strong cash flow generation. Adjusted profits rose 14% in 2023, while earnings per share grew nearly 17%, reflecting its ability to absorb input costs without sacrificing margins. Tesco's diversified business model—spanning groceries, fuel, and financial services—provides a buffer against sector-specific shocks. However, risks loom: a potential price war with rivals like Asda could erode margins. Investors should monitor like-for-like sales trends and capital allocation decisions.

2. GSK: Healthcare's Steady Hand

GlaxoSmithKline, with a 4.11% yield, offers a compelling blend of income and innovation. The pharmaceutical giant's 75% payout ratio is conservative for its sector, ensuring dividends are backed by both earnings and free cash flow (51% coverage). While earnings per share have declined 6.3% annually over five years, GSK's pivot to specialty medicines—such as HIV treatments and oncology drugs—has driven revenue growth.

The company's inflation resilience stems from its pricing power in essential healthcare products and vaccines. Recent acquisitions, including Boston Pharmaceuticals, and a robust pipeline of drug approvals position GSK to outperform in a high-cost environment. A £2 billion share buyback program further enhances shareholder value. However, long-term investors should watch for stagnation in dividend growth, as the 4.8% annual decline in DPS over the past decade suggests a cautious approach to payouts.

3. Legal & General: High-Yield Insurance with Caveats

Legal & General's 8.2% yield is a siren call for income seekers, but its 483% payout ratio raises red flags. The insurer funds dividends through asset sales (e.g., £1.2 billion from Cala Homes) and a £500 million buyback program. While its Solvency II ratio of 232% and £6.98 billion in free cash flow provide a buffer, the company's reliance on non-recurring gains and sensitivity to interest rates pose risks.

Legal & General's strategic focus on high-margin annuities and workplace pensions offers growth potential, but its net debt/EBITDA ratio of 2.1x and declining asset management revenue (-10% in 2024) highlight vulnerabilities. Investors must weigh the immediate income against the likelihood of dividend cuts if earnings falter. For those with a high-risk tolerance, the stock's undervaluation (price-to-book of 0.65x) and aggressive buyback plans make it a speculative play.

The Strategic Case for Immediate Action

These three stocks represent a balanced portfolio for inflation-protected income. Tesco and GSK offer stable, sustainable payouts in sectors with pricing power, while Legal & General provides a high-yield alternative for those willing to tolerate volatility. The key to success lies in diversification: pairing defensive retailers and healthcare firms with a high-conviction insurer can mitigate sector-specific risks.

Investors should act swiftly to lock in current yields, particularly for Legal & General, where a 8.2% payout is unsustainable without earnings growth. For GSK and Tesco, the focus should be on long-term reinvestment in their core businesses to sustain dividend growth. In a world where inflation erodes cash value, these stocks offer a rare trifecta: income, resilience, and strategic reinvestment.

Final Verdict: While no investment is risk-free, the combination of Tesco's defensive retail model, GSK's healthcare innovation, and Legal & General's high-yield strategy creates a robust foundation for inflation-proof income. For those prioritizing stability, Tesco and GSK are must-haves. For income-focused speculators, Legal & General's yield warrants a cautious bet—but only with a clear exit strategy. The market's volatility demands decisiveness: act now to secure these high-conviction plays before inflation-driven valuations shift again.