Research by Goldman Sachs shows that during periods of high inflation (‘high’ being defined as greater than 5%), dividend stocks tend to do better than the wider market. This motivated me to add a couple of quality high-yield shares to my Stocks and Shares ISA.
Both stocks I bought have dividend yields above 6%. And I plan to snap up more shares early next year.
Pensions stalwart
Legal & General (LSE: LGEN) is one of the premier financial services groups in the UK. It’s a company with a rich heritage stretching back nearly 200 years.
The stock pays a reliable dividend, currently yielding 7.6%. The dividend per share has risen at an impressive compound annual growth rate (CAGR) of 11% over the last decade.
Yet I think growth should continue for many years, particularly in the firm’s retirement solutions segment. That’s because global institutional pension fund assets in the 22 largest markets reached $56.6trn last year. And that mind-boggling figure should only grow in the coming decades as the ageing world population lives longer.
At the end of September, the stock dropped 20% in a single week after the previous government’s mini-budget. This debacle led to panic selling of UK government bonds, which fuelled uncertainty about Legal & General’s own pension fund liabilities.
I thought the sell-off was melodramatic. Among other things, Legal & General is a highly-regulated insurance company, which means its liquidity ought to be regularly stress-tested. Thankfully, I added to my position just before management reassured the market and the share price rebounded.
Of course, that’s not to say the stock is completely risk-free. We still don’t know how long or severe a global recession might be. Any drop in profits at the firm could threaten its dividend growth, and ultimately its share price.
Still, I think the shares are undervalued and offer solid compounding prospects over the next decade. I plan to buy more in the New Year.
Energy transition
Unlike Legal & General, my recent purchase of BlackRock World Mining Trust (LSE: BRWM) was a new position for me. This trust runs a diversified portfolio of global mining stocks.
The decarbonisation of the global economy is a process that’s probably going to take the rest of this century. And this transition is going to need a lot of raw materials, most of which are mined by the companies held in the trust’s portfolio. Rio Tinto, Glencore and BHP Group are all major holdings.
There’s a lot of complexity (and volatility) in commodity investing, mainly due to its cyclicality. Iron ore, for example, became the world’s most volatile commodity for a time last year. But I like the fact that the trust’s management team specialises in such things, rebalancing the portfolio accordingly. It saves me from picking individual mining stocks and monitoring various commodity markets.
The stock has a dividend yield of 6.2%, with a strong track record of increasing payouts. And it has performed strongly, rising 88% over the past five years (without factoring in dividends).
As mentioned, mining stocks can experience significant volatility and sudden cuts to the dividend. The trust may be well diversified, but doesn’t stop occasional big swings in the share price. Even so, I intend to use these dips to build out my position in 2023.
