As inflation spirals out of control, the UK looks set to enter a period of unprecedented monetary tightening not seen since the Bank of England was granted operational independence. In this environment, I’m searching for dividend stocks to buy that can help my portfolio keep pace with the rising cost of living.
A FTSE 250 stock I believe should perform well in these challenging conditions is Investec (LSE: INVP). The received wisdom in investing circles is that banking shares tend to outperform as interest rates rise because they can charge more for their loans. Currently offering a 5.5% dividend yield, here’s why I consider Investec stock to be a good buy today.
An Anglo-African bank
The Investec share price has performed comparatively well this year. It’s up 7.5%, while the FTSE 250 index has plunged over 21.5%. I believe the primary reason for this is the bank’s status as a specialist lender and asset manager, servicing the needs of high-value clients in South Africa and the UK.
Many mid-cap stocks are vulnerable to changes in consumer spending as household budgets are squeezed. However, Investec’s client base will be actively seeking ways to preserve wealth, lifting demand for the bank’s services.
Evidence for this can be found in the company’s latest results. In the last financial year, Investec delivered a 90.7% increase in adjusted earnings per share. It also recorded an 82.1% uplift in adjusted operating profit and funds under management hit £63.8bn. This exceeds the pre-pandemic level of £55.8bn in 2019.
These are impressive numbers. What’s more, the business is geographically diversified. Southern Africa accounts for 45% of its operating income and 55% comes from the UK and other jurisdictions. Accordingly, I regard Investec shares as a good way to gain exposure to emerging markets in my portfolio.
Crucially, the group’s target dividend pay-out ratio is 30% to 50% of the consolidated adjusted earnings per share. It has a reliable history of delivering dividends during difficult times, such as the Covid-19 recession and the 2008 financial crisis.
Risks for Investec shares
As with all investments, the shares come with risks. While on balance I like the exposure to the South African economy Investec offers, this does raise some concerns for me.
South Africa is a young democracy and no stranger to violent protests. It ranks 118th out of 163 countries in the Global Peace Index and has experienced difficulties with corruption and bribery in its business culture.
There are also wider risks posed by a slowdown in the global economy. Investec shares have enjoyed strong momentum since their 2020 lows. However, capitulation in the stock market could prove to be a setback to further growth.
Why I’d buy this FTSE 250 dividend stock
Bearing the risks in mind, Investec still looks like a promising investment to me. The bank has a healthy financial position and a solid track record of rewarding shareholders with distributions through thick and thin. I believe it’s better placed than most FTSE 250 stocks to withstand turbulent times ahead as interest rates soar.
Overall, I think this dividend stock would make a good addition to my diversified passive income portfolio.
