Many of us invest for dividends. Passive income is often spoken about as the holy grail of investing. We can also use dividends as part of a compound returns strategy — perhaps the most effective way to generate wealth over the long run.
And of course, sometimes the best time to buy dividend stocks is when the market is in retreat. That’s because share prices and dividend yields are inversely correlated. So with many investors fearful, I think it’s the perfect time to pick up these three dividend stocks. That’s my plan in July.
Investors have turned against Lloyds (LSE:LLOY) in recent weeks, and even more so when the Bank of England pushed interest rates up to 5%. This is understandable as Lloyds is highly exposed to potential defaults within the mortgage market. More than half of Lloyds’ loans are mortgages.
In Q1, Lloyds increased bad loan provisions to £243m, but this was much less than the market expected. With interest rates increasing further, there’s concern about the size of the hit in the coming quarters.
However, I anticipate the impairment charges will be easily affordable. Of course, I could be wrong. But we have to take into account the huge tailwind in the form of higher interest rates. Rises over the past 18 months represent a seismic shift from the near-zero rates of the last decade. As a result, first-quarter pre-tax profit came up in £2.26bn, up 46% year on year.
Today’s 5.6% dividend yield is strong, and it was covered three times by earnings last year. But I’m buying for the forward yield, which could reach 7% by 2024.
Legal & General
Legal & General (LSE:LGEN) offered one of the strongest yields on the FTSE 100, even before Thursday’s rate rise that sent stocks tanking. With the share price falling, the dividend yield has pushed upwards to 8.8%.
The dividend isn’t as well covered as Lloyds, but cash generation is strong and stable at Legal & General, and that helps sustainability. I don’t see it being cut unless we see a dramatic fall off in performance.
Inflation can represent a challenge for insurance companies, and this week’s data isn’t positive. But there are long-term tailwinds, including developments in the bulk annuity space — an insurance policy purchased by trustees of defined benefit pension schemes to offload risk.
Rising interest rates won’t help Vistry Group (LSE:VTY) or any of its peers. Higher mortgage rates are demand killers for the private market, which has, until now, held up fairly well.
However, Vistry also has an affordable housing unit. This part of the business provides insulation against the volatility of the private market because demand comes from the state’s need to build more affordable homes.
Because of this, it’s my top pick in the housing sector. After the interest rate rise, the share price fell, and the dividend yield pushed upwards to 8.5%.