2 juicy income stocks to supercharge my returns!

I’m looking at these income stocks to enhance the revenue-generating capacity of my portfolio as inflation soars.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Cheerful young businesspeople with laptop working in office

Image source: Getty Images

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

James Fox has shares in Crest Nicholson and HSBC. The Motley Fool UK has recommended HSBC Holdings and Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

GSK shares plummet 15% in a week! What’s going on here?

GSK shares had a bad time last week. They're down 15% as investors' sentiment soured ahead of litigation proceedings in…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Stock market recovery: have all the bubbles now burst?

Asset bubbles keep on coming, and here's what I'm doing to navigate through them and invest for the stock market…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

How I’d invest £290 a month in UK shares for a passive income that beats the State Pension

UK shares can offer a lucrative path for passive income. Our writer considers a plan to double his State Pension.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 of the best shares to buy now with £2,000

I reckon the best shares to buy now have strong growth in earnings and recent good news flow, such as…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m aiming for £500 a month in income from dividend stocks 

Here's my three-step plan for achieving a growing income from dividend stocks and three companies I'd use to help execute…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

UK shares are cheap! So why is Warren Buffett ignoring them and should you too?

Many British shares are trading cheaply and pay dividends. This is normally the hunting ground for Warren Buffett, yet he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’ve increased my passive income by 600%

Finding the right opportunities can bring spectacular results. Here’s how our author has managed to increase his monthly passive income…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Could lithium shares make my Stocks and Shares ISA a goldmine?

Our writer is considering buying lithium shares for his Stocks and Shares ISA. Here, he outlines the decision process he…

Read more »