With inflation at a high level, many dividend yields can suddenly seem less attractive than they would have just a few months ago. Expected annual income that would have beaten inflation may now not do that. But as a long-term investor, I do not expect inflation to stay as high as it is now forever. So some of the yields currently on offer look very juicy to me. I am considering what income shares to buy for my portfolio in coming days. Here are two I would consider.
M&G
The investment manager M&G (LSE: MNG) has a yield right now of 9.3%.
Can it sustain that? No dividend is ever guaranteed. But M&G’s policy is to maintain or increase its dividend annually. So far it has succeeded in doing that, although it has only been listed as an independent company for less than three years.
The basis for the dividend is profits the firm makes from managing funds. I like that as a business model because the sums involved are so large that even a modest commission can translate to sizeable profits. At the end of last year, the company had £370bn in assets under management and administration.
Even so, one risk with a share like this is that if customers withdraw funds, its profits will decline. With a worsening economic situation, that remains a risk. But last year the company turned a net outflow of funds into a net inflow. If it can continue that trend, I think it could be good news for future profits – and the dividend.
Persimmon
I already think the M&G dividend yield is very attractive. But an even larger one is currently on offer at housebuilder Persimmon (LSE: PSN). A yield of 13.2% could be a sign that the share is a value trap. So, why would I consider buying it for my portfolio?
The high yield reflects a couple of factors in my view. One is concern among investors that a worsening economy could hurt demand for houses. That might be bad news for both revenues and profits at Persimmon. Another factor more specific to the company than the housebuilding industry overall is concern about the sustainability of its dividend, which is barely covered by earnings as it is.
That does not concern me much. Persimmon explicitly seeks to return most excess capital to shareholders. I think its high yield reflects that. Even if the company only paid its ordinary dividends and stopped the payouts it uses to return excess capital on top of that, Persimmon would still be an attractive income share from my perspective.
If the housing market gets very bad, even the ordinary dividend is not guaranteed. But I think the company benefits from a well-honed business model including high profit margins. There is an ongoing mismatch between housing demand and supply, which I do not expect to change in the short term.
Income shares to buy now
Looking for big rewards can bring big risks too. Certainly I think both M&G and Persimmon have risks, which is partly why they offer high dividend yields.
But I think the prices already reflect such risks. I see both as attractive income shares to buy for my portfolio at their current level.
