The current high rate of inflation has caused several issues for investors. Growth stocks have been especially beaten down, as the future value of their cash flows has been reduced. However, passive income stocks still seem tempting, especially where their dividend yields are higher than inflation. Here are two UK passive income stocks that grab my interest right now.
The insurance giant
Legal & General (LSE: LGEN) has always been one of the top dividend payers in the FTSE 100. In the recent full-year results, the dividend rose another 5% to reach 18.45p. At the current share price, this equates to a yield of 6.5%, far higher than other FTSE 100 stocks.
There is also evidence that this dividend is very well covered and sustainable. For example, the results were excellent. In fact, profit after tax managed to reach over £2bn for the first time, a year-on-year rise of 28%. This means that the coverage ratio of the dividend was 2. As such, the company remains cash-rich and can both invest money into the business and absorb any losses that arise. There are also ambitions to continue increasing the dividend each year up to 2024. This cements LGEN as one of my favourite passive income stocks.
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There is a slight risk due to the asset management sector. The turbulent nature of the stock market now means there is the possibility for assets to lose value, especially in the event of a stock market crash. But despite these risks, I still see LGEN as a ‘no-brainer’ buy for me. After its 2021 results, it has a price-to-earnings ratio of around 8, demonstrating very good value. With an ageing population, combined with the company’s annuities portfolio and pension risk transfer programme, demand also seems set to increase. I may add more LGEN shares to my portfolio.
A renewable energy passive income stock
Another passive income stock I own in my portfolio is NextEnergy Solar Fund (LSE: NESF). The renewable energy specialist has managed to increase its dividend year-on-year, and recently it announced another 5% increase to 7.52p per share. This is the fund’s eighth consecutive dividend increase. This also gives it a dividend yield of over 7%, even higher than LGEN.
It said the recent dividend increase “reflects the strong position of the company, its secured revenue flows, strong operational asset base and attractive growth prospects”. This highlights the strong growth prospects for the renewable energy sector. These growth prospects should further develop in the current climate, where gas and electricity costs are soaring.
The major risk is that the company has a cash dividend cover of around 1, meaning that there is no money left over the reinvest into the company. It also increases the chances of a dividend cut.
But for now, the fund is performing well, and the dividend has continued to grow. It also far surpasses inflation. These factors are why NESF is a part of my portfolio already. And I feel that now is a good time to buy some more.
