Inflation came in higher than expected in the UK for February. And as such, I’m on the lookout for income stocks that I can potentially add to my portfolio to help hedge against rising interest rates.
Owning income stocks is a great way to generate passive income. And with the financial sector taking a hit in recent weeks following a turbulent period, I see opportunities for me to snap up some shares cheaply.
Here are two stocks I’m strongly considering.
Lloyds
First up is Lloyds (LSE: LLOY). The FTSE 100 bank is already a staple in my portfolio. However, with it taking a 9% hit in the last month, I’d be keen to top up my holdings.
As I write, Lloyds stock offers a 5% dividend yield, which comfortably sits above the average of its Footsie peers. While this isn’t inflation-beating, it does offer me a hedge, to an extent, against rising prices. And it most certainly beats me letting my cash erode in the bank.
I’m not a fan of Lloyds just for its dividend yield. The stock trades on a price-to-earnings (P/E) ratio of around six, which is lower than the ‘benchmark’ of 10.
It’s also set to benefit in the months ahead as the Bank of England continues with its fight against inflation. To mitigate rising rates, the BoE has been increasing interest rates, with the base rate currently sitting at 4.25%.
As a result, 2022 saw its underlying net interest income rise by 18%, as the business charged customers more when borrowing. With analysts predicting rates to increase until the summer, Lloyds look set to continue to profit.
Despite this, higher interest rates mean it’s more likely customers will default on loan payments.
With its sole focus on the domestic market, the business is also more susceptible to the UK economy than its competitors.
HSBC
Second on my list is HSBC (LSE: HSBA). Like Lloyds, the stock has taken a hit in the last month, with its price down by 13%. However, a falling price means a higher yield.
The stock currently offers a dividend yield just shy of 5%. And to add to this, it also has a P/E ratio of around nine, which is below the FTSE 100 average of 14.
The business recently bought the UK arm of Silicon Valley Bank following its collapse. This adds to its already diversified business.
I like the international exposure that HSBC provides, with a large chunk of its revenues originating from Asia. With economies such as China set to boom in 2023 and beyond, I think this area offers a wealth of opportunities.
With this said, exposure to China also poses a risk due to high geopolitical tensions. Any negative developments could see the HSBC share price slide.
However, with a large customer base, and with profits coming in at over $17bn last year, I deem it a solid investment.
My verdict
Both of these income stocks look like attractive propositions right now. However, I don’t have the spare cash currently to buy both. Given my position in Lloyds, should I have some disposable cash in the weeks ahead, I’ll look to pick up HSBC.
