With UK inflation at 7% and rising interest rates, I’m looking for income shares that can generate high yields while protecting my capital.
Today, I’m going to look at three UK dividend stocks I’m keen on, two of which I already hold in my Stocks and Shares ISA.
£1bn spare cash
FTSE 100 housebuilder Barratt Developments (LSE: BDEV) expects to report at least £1bn of surplus cash when its financial year ends on 30 June. This should provide comfortable support for the group’s forecast dividend yield of 7.8%.
Indeed, my sums suggest that Barratt could maintain its dividend for nearly three years with this level of cash. Of course, that’s unlikely to be necessary. By 1 May, Barratt was fully sold out for the year ending 30 June.
In total, Barratt has forward sales of £4.4bn on its books. Its new home build rate and sales reservation rate are both around 10% higher than a year ago.
The big risk here is that inflation and rising interest rates could see the UK fall into recession. That could slow new home sales and put pressure on prices.
However, the Barratt share price has already fallen by 35% over the last year. That’s left the stock trading in line with its book value, on just six times forecast earnings.
I think there’s a margin of safety here, so I’d be happy buying the shares for income.
The best UK bank?
Close Brothers Group (LSE: CBG) isn’t a household name like Lloyds or Barclays. But unlike its famous peers, this FTSE 250 merchant bank didn’t cut its dividend during the financial crisis. Although the payout did drop in 2020, it’s already returned to pre-pandemic levels.
This group specialises in commercial lending and motor finance. It also has a stockbroking business, Winterflood Securities. This proved useful during the pandemic, when volatile stock markets led to bumper profits from share dealing. This helped to offset a temporary dip in lending profits.
Like Barratt, Close Brothers is exposed to the risk of a UK recession, which could lead to loan losses and a slump in new lending.
However, Close is far more profitable than the big high street banks and has been in business for 144-years. With a forecast dividend yield of 6%, I’m tempted to top up my holding.
I can’t ignore this 6.9% yield
Tobacco stocks have a reputation as good income shares. British American Tobacco (LSE: BATS) offers a tempting 6.9% dividend yield that’s covered by earnings. The group’s dividend payout hasn’t been cut for at least 20 years and continues to look very safe to me.
Of course, investing in tobacco carries ethical issues, plus the real risk that sales could be more heavily restricted in the future.
However, BATS is ahead of some rivals in terms of adopting lower-risk products. Sales of non-combustible products such as vapes rose by 51% to £2,178m last year. Management expects this figure to reach £5bn by 2025 – around 20% of total sales.
The BATS share price looks cheap enough to me to reflect the risks of investing in tobacco. The stock currently trades on just nine times forecast earnings and offers a jumbo 6.9% dividend yield. I’m happy to buy and hold the shares in my ISA at this level.
