Income stocks provide me with regular dividend payments. Of course, payments are not guaranteed but these stocks remain central to my strategy to build wealth. And by investing in companies with reliable and sustainable dividend yields, I’m creating a passive income stream that will, hopefully, last for the long run.
Sustainable dividend yields
The dividend coverage ratio is a metic used to explore how sustainable a dividend yield might be. It measures the number of times a company can pay shareholders a stated dividend using its net income.
A coverage ratio above two is generally considered healthy. A ratio below 1.5 may be a cause for concern. And a coverage ratio of one or below suggests the dividend payments would be hard to sustain. However, there are other factors, such as cash generation and reserves, to take into account.
If a company’s total dividend payment is the same as the firm’s net income, then the dividend coverage is one.
Supercharged yields
The FTSE 100 might be pushing towards 7,500, but that’s largely due to surging resource stocks. In truth, many UK stocks are trading at discounts right now, especially in sectors such as retail, housing and banking.
And as share prices fall, dividend yields rise. And that’s why I’m buying dividend stocks now. It’s also important to remember that the dividend yield is always relevant to the price I pay for the stock, regardless of future share price fluctuations.
Pick 1:
Shares in Direct Line Group (LSE:DLG) dipped earlier in the year as performance dropped. The firm noted a 31.8% decline in first-half pre-tax profit as claims inflation ate into margins. However, the company admitted it had been caught out by rising inflation and has taken steps to rectify it.
Direct Line says that through steps taken within its garage network, as well as increasing prices, it has returned to writing at target margins “based on latest claims assumptions“. With this, Direct Line’s performance should recover towards 2021 levels. It is also the case that Direct Line should be able to earn more by investing cash premiums as interest rates rise.
I’ve recently added Direct Line to my portfolio and, right now, the stock has an 11% dividend yield. The dividend coverage is just 1.1, but the firm’s cash generating capacity is solid.
Pick 2:
Close Brothers Group (LSE:CBG) is a FTSE 250 firm providing securities trading, lending, deposit-taking and wealth-management services. The stock is down 22% over the year, but up 12% over the last month.
Last week, the firm said that it had delivered a “solid” first quarter performance despite trading in “challenging” market conditions. The group’s loan book grew marginally to £9.13bn from £9.1bn, reflecting continued demand in its commercial businesses. Annualised net inflows within its asset management arm came in at 7%.
Right now, the stock offers an attractive 6.2% dividend yield. I already own Close Brothers shares, but I’d buy more now to take advantage of the sizeable yield. Despite a recessionary forecast, I think Close Brothers should be well positioned to weather the storm.
