The spectre of recession continues to haunt the UK, meaning that investors chasing passive income need to take action. Should profits slump among British shares then the size of the dividends these stocks pay out could take a huge hit.
Several bodies including the Bank of England and International Monetary Fund have upgraded their GDP forecasts in recent sessions. But weak economic conditions — and perhaps even a recession — are still a strong possibility as Bank of England hikes rates to curb inflation.
Two rock-solid dividend stocks
In this environment, investors seeking near-term passive income should perhaps select defensive stocks like utilities, food producers, telecoms providers, and defence contractors.
Businesses like this aren’t the most exciting when times are good. But their stable profits can make them excellent dividend stocks in tough periods like this.
Here are two from the FTSE 100 that I think risk-averse investors should snap up today.
Severn Trent
Water is an essential ingredient for life. So suppliers like Severn Trent (LSE:SVT) tend to report stable earnings at all points of the economic cycle.
Okay, keeping critical water infrastructure is expensive business. And this can take a big bite out of earnings. But so far this hasn’t stopped the company’s ability to keep raising dividends over the long term, though past performance is never a guarantee for future results.
Buying Severn Trent could be a good idea in the current landscape of high inflation, too. The business is committed to raising annual payouts in line with the rate of consumer price inflation including housing costs (CPIH), at least until the current AMP7 regulatory regime expires in 2025.
I also like this utility as it generates more than half (53%) of the energy it uses from its own sources. This provides the company with some protection from soaring fossil fuel prices.
The company carries a forward-looking dividend yield of 4.3%. This beats the corresponding FTSE index average of 3.8% by a healthy margin.
BAE Systems
Weapons spending from sovereign nations also remains largely unchanged regardless of economic conditions. This is what makes BAE Systems (LSE: BA.) such a reliable dividend grower. It carries a healthy 3% yield for this year.
In fact now could be a good time to buy defence stocks regardless of the outlook for UK GDP. Arms-related expenditure is surging as worries in the West over Russian and Chinese foreign policy grow.
Fellow defence firm QinetiQ said this week that orders soared 41% in the 12 months to March to a record £1.7bn. This followed BAE Systems’ recent announcement that “order flow on new programmes, renewals and progress on our opportunity pipeline remains strong”. Orders here hit all-time highs of £37.1bn in 2022.
Earnings at BAE Systems could be derailed by the loss of key contracts to competitors. However, strong relationships with the UK and US help reduce this threat.
