Many people invest for the opportunity to earn a second income. We can do this by investing in dividend-paying stocks.
But, like most investors, I want to ensure I’m earning as much as I can in dividends, without sacrificing sustainability.
As such, a stock market correction is the perfect time to invest. That’s because when share prices fall, dividend yields go up.
So, here are three stocks I think investors should be piling into.
Phoenix Group (LSE:PHNX) went ex-dividend this week. The payment was equivalent to around 4.8% of the current share price and contributed to its sizeable 9.3% dividend yield — one of the largest on the FTSE 100. The yield, which was already sizeable, has been pushed upwards by its falling share price. The stock fell 10% over the last month as fear hit the finance sector.
The UK’s largest long-term savings and retirement business is performing well, despite the sell-off that impacted other finance stocks more than Phoenix. It recently announced that, on an IFRS basis, adjusted operating profits grew to £1.24bn, up from £1.23bn in 2021.
The group saw its assets under administration fall to £259bn from £310bn over the last year. And that’s something of a concern amid the current volatility. However, it’s a business model designed to be resilient throughout the economic cycle.
I’m buying more Lloyds (LSE:LLOY) shares after the correction. The stock is down 10% and the dividend yield is up to 5.2%. Moreover, analysts see the dividend rising to 2.7p and 3p in 2023 and 2024 respectively, representing a near 6.5% yield in 2024.
More broadly, I like Lloyds and its ‘boring’ business. Lloyds doesn’t have an investment arm and because of its funding composition, it has higher interest rate sensitivity than other banks.
This means it’s less diversified than other banks, but right now, it benefits from interest rate hikes more than most. But there’s also a downside to this. At the moment, Bank of England rates are very high, and this means more debt turning bad as borrowers struggle with repayments.
But with rates forecast to fall to an ideal 2%-3% in the medium term, I think now is a great time to buy.
I’ve recently consolidated some of my housing stocks into my top pick for the sector, Vistry Group (LSE:VTY). Down 5% over a month, the stock’s dividend yield now sits at 7%.
The housebuilder recently reported better-than-expected full-year profits and said market conditions were improving. It also said that private sales have ticked upwards in recent months despite interest rate rises — the sector needed some good news.
But, more important, Vistry has some insulation from the private market’s woes because of its large ‘partnerships’ or affordable homes business. Demand is certainly more resilient here.
With an improving interest rate forecast, and recession fears reducing, I’m expecting conditions to improve considerably into 2024. I definitely see some upside potential.