Income stocks are a great way to protect my portfolio against rising inflation. With it currently sitting at over 9% in the UK for May, the situation across the pond isn’t faring much better. Yesterday the US saw rates spike to a 40-year high.
With rising inflation meaning volatility is running rife, I’m on the lookout for stocks with healthy dividend yields to put my money to work. Here are two I’ve got my eye on.
My first pick is FTSE 100 constituent Lloyds (LSE: LLOY).
The stock’s current dividend yield is an attractive 4.77%, which sits firmly above the FTSE 100 average. This isn’t inflation-beating, but it’s most certainly more rewarding than keeping my cash in the bank.
There are other reasons to pick Lloyds too. I like the bank’s low valuation. With a price-to-earnings (P/E) ratio of 5.6, this falls well within the ‘value’ benchmark of 10. And compared to its peers, Lloyds also looks cheap. For example, HSBC currently trades on a P/E of 11.
Hiking interest rates could see the firm suffer if its customers default on their loans. Yet on the other hand, higher rates will also allow Lloyds to charge borrowers more when lending. Interest rates were recently set at 1.25%. And with another review scheduled for August, there have been hints of a 0.5% hike. It could benefit from this.
Lloyds is also the UK’s largest mortgage lender. With loans for properties accounting for over two-thirds of its lending, the business may see a slowdown in growth for the foreseeable future as the booming housing market hits the brakes. However, I still think it would be a strong addition to my portfolio.
I also like the look of Rio Tinto (LSE: RIO). With an impressive dividend yield of 12.1%, this trumps that of Lloyds. It also beats the UK inflation rate, offsetting the possibility of my cash eroding.
It’s the second-largest mining company in the world, and it currently trades for around £47 per share.
Just like Lloyds, the stock looks cheap. It has a 4.4 P/E, considerably lesser than that of competitor Glencore (13.3).
On top of this, it also had £1.6bn of net cash, according to its 2021 full-year report, so the firm is in a healthy financial position to pay dividends.
It will also benefit from the large investments we’re set to see in the renewable energy sector. Electric vehicles and their charging infrastructure, along with renewable energy power plants, will see a rise in the long-term demand for iron. The business has also been increasing its stake in mining lithium – including the recent purchase of Rincon lithium project.
It does, however, faces headwinds, as ongoing Covid concerns continue to plague China. Demand for iron ore may wane in the months ahead. China accounts for around half of global steel output, and iron ore is a key material, meaning Rio Tinto may suffer.
However, with its low valuation and strong long-term outlook, I’d buy the stock today.