Income stocks form a core of my portfolio. They have become an even larger part over the past 12 months as growth stocks started to look expensive and inflation soared to levels not seen in decades.
As such, I’m looking for stocks offering sustainable and inflation-beating returns. So, here are two I’m looking to buy to supercharge returns for my portfolio.
Persimmon
Persimmon (LSE:PSN) is frequently touted as a big dividend stock. In fact, it’s the highest-paying income stock on the FTSE 100 at 10.5%. That’s certainly impressive and it’s inflation-beating for sure, but there are questions about its sustainability.
Last year, Persimmon — which is the UK’s second largest housebuilder — had a dividend coverage ratio of 1.06. That’s certainly not great, but the housebuilder is expecting another stellar year in 2022, and that coverage ratio could become healthier. Equally, the dividend could be reduced, but I’d be surprised if it fell considerably given the sector’s current profitability.
However, the reason Persimmon makes this list is because it is seemingly less impacted by the cladding crisis than other housebuilders. The firm expects to spend £75m on recladding homes in the UK. This is less than 10% of the company’s pre-tax profits in the last reporting year. By comparison, Crest Nicholson‘s pledge will pretty much wipe out its FY2022 profits.
I’ve held off buying Persimmon, but now I think it’s in a good position compared to its peers. It’s also going ex-dividend on June 16. It’ll be the last dividend payment in relation to the year ended 31 December 2021. At today’s price, this single payment represents a 5% yield.
Higher interest rates could hurt demand for new houses, but I think the long-term prospects here are good.
M&G
M&G (LSE:MNG) is relatively new to the index, having emerged from a demerger with Prudential in 2019. The company, which offers an 8.44% dividend yield, is a London-headquartered investment management company that deals primarily with equities, portfolio management, fixed income and real estate.
In May, HSBC upgraded M&G to “buy“, citing an attractive valuation at the current share price despite the sector delivering “underwhelming” performances in the last 12 months. “We see M&G offering very attractive total capital return yields at an average of 20% per annum over 2022-24, which correspond to the group returning circa 60% of its market cap to shareholders over three years,” HSBC said.
M&G earns commission on the large sums of money that it manages, so the business model is fairly secure. However, when M&G earns more money for its customers, it earns more commission.
Last year wasn’t a great year for the asset manager. Adjusted operating profit before tax has dropped to £721m in 2021 from £788m in 2020. The poor performance was due to losses resulting from short-term fluctuations hitting investment returns and higher restructuring costs.
I think the outlook for this asset manager is positive, and its valuation is attractive. One issue is investors taking their money out of M&G, but last year net outflows from retail asset management were offset by inflows from institutional investors.
I’m looking to add both stocks to my portfolio.
