Dividend stocks can be a great source of passive income. However, pick the right stocks, and you can potentially enjoy both income and capital gains – a magical combination.
Here, I’m going to highlight two UK shares that have the potential to deliver both income and gains in the years ahead. In my view, both are worth considering as long-term investments as we enter July.
A strong set-up as we start H2
I’m going to start with a stock that’s a little on the adventurous side and that’s IG Group (LSE: IGG). It’s a financial trading and investment company that’s in the FTSE 250 index.
I like the look of the set-up here right now. For starters, the stock is cheap and the yield is attractive. Currently, the price-to-earnings (P/E) ratio is only about 10. That’s well below the UK market average. As for the yield, it’s about 4.5%, which is decent. Note that dividend coverage (the ratio of earnings per share to dividends per share) is high at around 2.2 signalling a low chance of a dividend cut in the near term.
Secondly, this company is well placed to benefit from a range of trends including high levels of volatility in the financial markets (volatility generally leads to high levels of trading) and interest in crypto-assets. Recently, it launched a crypto trading service for retail investors in the UK.
It’s worth pointing out that there’s a lot of competition in the trading/investing industry. And competition from rivals such as Robinhood and Trading 212 is a risk.
All things considered, however, I see a lot of potential in this stock.
A blue-chip dividend stock
Those looking for a stock that is a little more ‘blue-chip’ may want to check out HSBC (LSE: HSBA). One of the largest companies in the FTSE 100 index, it’s a globally diversified banking powerhouse.
As with IG, the numbers here look good. Currently, HSBC trades on a P/E ratio of just nine, which is below the market average and a lot lower than the earnings multiples on some other major bank stocks (JP Morgan currently trades on a P/E ratio of 16).
As for the yield, it’s an attractive 5.5%. Dividend coverage is solid at around two times.
Looking beyond the numbers, I like the fact that HSBC is focused on high-growth areas of banking such as Asia and wealth management. This should help it grow its earnings in the years ahead.
I also like the fact that it’s buying back its own shares and is focused on cutting costs (it’s currently undergoing a restructuring to create a “simple, more agile, focused bank”). This should also help earnings.
A risk here is a major economic slowdown. In this scenario, I’d expect bank stocks to underperform since their earnings are highly correlated to economic conditions.
Taking a five-year view, however, I see the potential for attractive overall returns here.
