I prefer buying income to growth stocks. That’s because they can offer regular revenue and don’t suffer from the same levels of volatility as growth shares. So, yes, it’s a lower-risk strategy.
The stock market has slumped this year, with the exception of companies operating in resource sectors. But as share prices have fall, dividend yields grow, assuming the dividend payments remain the constant.
So I think now is a great time to shop around for income stocks as yields are inflated and the share prices offer plenty of headroom for growth.
It’s also worth remembering that if I buy a stock, and the share price goes up, my dividend yield will always be relative to the price I paid.
So, here are two income stocks I’d buy now before the stock market recovers, which I’m certain it eventually will!
Legal & General
Legal & General (LSE:LGEN) shares are down 10% over the year. The stock collapsed after the Russian invasion of Ukraine, but had been doing well prior to this.
The British multinational financial services and asset management company performed strongly in 2021. Legal & General raised its dividend in April after recording a huge 39% increase in annual pre-tax profits. Pre-tax profits came in at £2.49bn. Profit after tax jumped 28% to £2.05bn.
The current dividend yield is 7.6% and last year the coverage — a ratio that indicates the ability of a firm to pay the dividend — was a relatively healthy 1.85. For 2022, L&G declared a full-year dividend of 18.45p, up 5% on the year.
There may be some short-term challenges for business. The investment management segment is unlikely to perform well amid a cocktail of negative economic pressures and sky-high inflation. It’s also very exposed to the property market through its capital investment business. This sector could see some downturn in the coming months with interest rates remaining high.
But in the long run, Legal & General is a massive player in asset management and I think its positive brand reputation will likely prevent capital outflows and attract customers.
Down 20% over the past six months, I also think there’s plenty of headroom for growth when investor sentiment recovers.
Phoenix Group
Phoenix Group (LSE:PHNX) is a life insurance specialist that owns household brands like Standard Life, SunLife and ReAssure.
The stock is currently trading under 600p a share, far below its 52-week high of 702p. Like much of the market, it’s come under selling pressure this year.
2021 was a record year for the business with cash generation surpassing £1.72bn, while operating profits rose to £1.23bn.
Following the earnings announcement, Phoenix Group recommended an increase to the final dividend by 3%, representing its first organic increase. The company said it was also shifting its dividend policy, moving from “stable and sustainable” to a sustainable payout that “grows over time“.
Previously, Phoenix Group had relied on mergers and acquisitions to fund payout increases.
One concern is the maturity of the businesses that Phoenix Group acquires. The company buys legacy life insurance and pension funds that are closed to new business and manages them. But it’s equally worth recognising that the firm has a solid record of savvy acquisitions and mergers to continue growing the business.
Phoenix Group is currently offering a very attractive 8.4% dividend yield.
