Last year, in the low-interest rate environment, investors profited hugely from growth stocks. However, many of these gains have now been wiped out, as growth stocks around the world have crashed.

Alternatively, dividend stocks have fared far better as investors attempt to offset the issues of inflation with large dividend yields. Here are two dividend stocks I’d buy at the moment, in my plan for passive income. 

Insurance giant 

Legal & General (LSE: LGEN) has been one of my favourite dividend stocks in the FTSE 100 for a long time. Indeed, over the years, the insurance company has managed to boost its profits, and this has translated into large dividends.

For instance, in 2015, the firm’s total dividend amounted to 11.8p per share, yet this has been raised year-on-year, and it now totals 18.45p per share. It is also expected that it will be able to grow further in the next few years.

These dividend increases, combined with the recent decline in the L&G share price, means the dividend currently yields 7.2%. This will certainly help offset inflationary pressures. 

Another reason I’m particularly keen on LGEN shares is the sustainability of the dividend. In the recent full-year results, profits after tax climbed 28% year-on-year to reach over £2bn. Conversely, the total cost of the dividend only totals around £1bn, meaning that there is still plenty of cash left over for reinvestment. 

There are some risks however. For example, as an insurance company, the LGEN share price is linked heavily to the UK economy. The fear of a UK recession is, therefore, a factor which could see the company’s share price sink. Despite this, with a price-to-earnings ratio of just 7.5, I believe these risks are well factored in. Therefore, I’ll continue to buy this insurance giant. 

A tobacco dividend stock 

Although tobacco stocks do not fulfil the criteria for many ESG investors, they are renowned for their strong dividends. British American Tobacco (LSE: BATS) is a prime example. Indeed, the company’s dividend currently yields over 6%, and there is a dividend cover of 1.5. This means it is well-covered by profits, and the firm does not need to issue debt to cover payments. This is a sign of a strong dividend stock. 

BATS is also proving resilient to the current issues of inflation. This is because it can raise the prices of its products, and consumers are likely to continue buying them. As such, the firm should be able to offset any increased costs resulting from inflationary pressures. This adds to the sustainability of the dividend. 

One key risk is the long-term future of the company, as tobacco becomes less and less popular. In this respect, the company is relying on its next-generation products, considered a healthier alternative. However, many doubt that these products will be able to fully offset lost revenues from the traditional tobacco business, and this could result in declining profits. 

Even so, with a price-to-earnings ratio of under 10, I’d be willing to take this risk and open a small position in BATS. Its inflation-resistant nature makes it a great pick in the current macroeconomic environment. 

The post 2 no-brainer dividend stocks to buy for passive income appeared first on The Motley Fool UK.

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Stuart Blair owns shares in Legal & General. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Trading update

Today, LGEN released a very positive half-year trading update. It announced that operating profits were over £1bn, up 14% from last year. Yet more importantly, this figure was up over 7% from the same period in 2019. This demonstrates that its financial performance is now well-above pre-Covid levels as well. Despite this, the share price is still 15% lower than its peak of last February. Personally, I feel that this does not reflect the excellent results the company has managed to achieve.

Furthermore, the future looks bright for this FTSE 100 stock, and it expects that it can deliver double-digit growth in operating profits for the whole of 2021. This should be aided by the company’s synergistic business model, which includes exposure to pension de-risking and asset management. In the long term, the ageing population is expected to fuel growth, especially in the annuities sector. Accordingly, the company has significantly more to it than just the dividend.

The dividend

Even so, the main reason I own Legal & General shares is due to the dividend. This has seen extraordinary growth over the past few years, cementing the insurance company as one of the largest dividend payers in the FTSE 100. In fact, in 2010, the full-year dividend totalled just 4.75p per share, in comparison to 17.57p last year. It is also continuing to grow, and in today’s trading update, the interim dividend was raised by 5%. Clearly, this makes LGEN stand out among other FTSE 100 stocks.

The dividend also looks sustainable, which is key for any large dividend payer. This is because it is well-covered by earnings. The firm is also aiming to grow the dividend by low-to-mid single-digits per year, while earnings per share are hoped to grow at a quicker pace. This shows that LGEN is still prioritising growing the business, and the large dividend is not detrimental to this.

Should I add more of this FTSE 100 stock to my portfolio?

Although I see LGEN in a very positive light, there are risks I must take into account too. For example, the share price is heavily correlated with the UK economy. As such, if the economic recovery starts to slow down, this is likely to have a negative impact on the company. The insurance sector is also highly competitive, and while L&G is currently a market leader, there is always the risk of new and innovative companies taking market share. 

But I feel that the positives of this stock far outweigh these risks. The 7% dividend yield is also too tempting for me to ignore. This means that I’ll probably add more of its shares to my portfolio soon.

The post I’d buy this 7% yield dividend FTSE 100 stock today appeared first on The Motley Fool UK.

More reading

• Could £20,000 invested in these 5 dividend shares produce £14,760 of passive income over the next 10 years?
• Buying £20k of Legal & General shares could give me a £1,714 income this year!
• £5,000 invested in Legal & General shares 5 years ago is now worth…
• 8.4%! Why do Legal & General shares always have such a high dividend yield?
• An 8.4% yield! A dividend growth stock to consider stashing in a SIPP for decades?

Stuart Blair owns shares in Legal & General. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.