Income stocks form the core part of my portfolio. These provide me with passive income through dividend payments which are received throughout the year — often quarterly.
Personally, I see now as a good time to buy income stocks. That’s because UK stocks have pushed downwards in recent weeks. And when share prices go down, dividend yields — the percentage of a company’s share price that it pays out in dividends each year — go up.
Knockdown prices
The chancellor’s mini-budget didn’t go down well with investors. The unfunded tax cuts and spending plans requires more international borrowing and the news sent the pound falling to its worst position against the dollar in decades.
It was also concerning to see UK fiscal policy working at odds with monetary policy. With the chancellor’s budget expected to push inflation up further, we can also expect interest rates to rise quicker — maybe even reaching 6% by the summer of 2023.
All this spooked investors — the FTSE 100 has dropped around 5% over the month. Some stocks fell further. As a result, yields have been inflated. It’s also important to remember that the dividend yield is always dependent on the price I pay for the stock.
M&G is a stock I’m looking at adding to my portfolio soon. It’s down 17% over the past month (-14% over the year). Attracting and retaining clients is a challenge for investment and savings companies like this one right now, amid a cost-of-living crisis and rampant inflation.
But things will improve and it’s not like business performance has been bad, considering the challenging environment. Equally, the falling share price has pushed the dividend yield up to 10.9%. Other investment firms like Abrdn are in a similar position — Abrdn offers a 10.7% yield.
Beaten-down blue-chips
Blue-chip stocks weren’t immune to the recent volatility. In fact, that so-called mini-budget and the recent government reports have impacted almost all parts of the market.
Banks are among those hit hard. In fact, bank shares tanked after reports that prime minister Liz Truss’s new cabinet has looked at changing the Bank of England’s money-printing programme to save the UK taxpayer billions of pounds.
NatWest is one such battered stock. The partially-government-owned bank is down 10% over the past month (down 6.5% over 12 months). And this has served to push the yield up to 4.9% — not a bad return from a FTSE 100 stalwart.
Banks also have one huge tailwind right now. And that’s rising interest rates. This allows them to enhance margins — the difference between savings and borrowing rates. Banks even make more interest on the money they leave with the Bank of England. Credit quality is one issue amid rampant inflation, but higher margins are a huge boost.
So, with £1,000 to spend on income stocks, I’d put half my money into NatWest and the other half into M&G. In fact, I already own NatWest stock and I’m also looking to add M&G to my portfolio soon.
