Dividend stocks form the core part of my portfolio. They provide me with regular (albeit not guaranteed) income. As a result, I’m always on the lookout for attractive and sustainable yields.
So, what makes now a great time to buy? Let’s take a closer look.
Depressed share prices, higher yields
The FTSE 100 might be pushing towards 7,500, but the reality is many UK stocks are down this year. The FTSE 250 is a better reflection on the health of the UK economy and it’s less distorted by surging resources stocks like BP and Shell — the index is down 17% over 12 months.
Firms in retail, housing, and banking, among other areas, have struggled in the inflationary and evolving recessionary environment. This is especially the case for stocks that are more UK-focused, although it’s true that the global economy is also facing unprecedented challenges.
Perhaps unsurprisingly, with investors looking six-to-12 months into the future, many have kept from these areas of the market. Housing especially. Several UK housebuilders are down 50% over the year.
However, the thing is, when share prices fall, dividend yields go up. And the yield at the point at which I buy is always the yield I will get, unless the dividend payment is changed.
Sustainable yields
So, in theory, now is a good time to buy dividend stocks because yields are inflated. Unless the dividend payments have been cut, some housebuilders’ yields are now around double what they were a year ago.
However, I need to be looking for sustainable payouts too.
Persimmon‘s yield reached 20% a couple of months back as the share price fell. Even last year, the firm’s coverage ratio indicated it only just has enough income to pay its shareholders. So, as the operating environment grew less favourable, Persimmon recently cut its dividends.
Buying at discounts
Stock market corrections happen from time to time. In fact, over the last three years, the market has demonstrated more volatility than we have seen in the preceding decade.
However, I contend that the current depressed nature of the market provides me with an opportunity that may not occur for another decade.
Right now, I can pick up stocks like Lloyds, NatWest and Close Brothers Group with yields of 4.4%, 4.5% and 6.6% respectively. I find that very attractive for stocks that operate in a traditionally steady and stable (albeit cyclical) industry.
I’m also looking at other financial services firms. Direct Line Insurance Group is currently offering a huge 10.5% yield and, after a tricky start to the year, the firm is now writing at target margins once again.
I’ve recently added all four of the above to my portfolio. And, with prices discounted, I’m continually on the lookout for more high quality stocks to add to my portfolio while paying close attention to the sustainability of the yields. I think this is an opportunity I might not see again for many years.
