Dividend stocks are the largest part of my portfolio. They provide me with a regular — but not guaranteed — income in the form of dividend payments.
Today I’m looking at discounted dividend stocks. While the FTSE 100 might be pushing towards 7,500, many UK stocks are currently trading at considerable discounts, including those in sectors such as retail, housebuilding, banking and travel.
There’s obviously concern that we’re entering a recessionary environment and as a result, there will be negative pressure on stocks. However, it’s worth noting that 70% of FTSE 100 companies’ revenue comes from abroad. So a recession doesn’t mean doom and gloom for all UK stocks.
With that in mind, I think these two look well positioned to outperform the market and provide me with passive income.
Knocked-down insurer
Direct Line (LSE:DLG) shares are down 23% this year and 20% in 12 months. That’s understandable as the company is not performing as well as it did last year. The Bromley-headquartered firm posted a 31.8% decline in first-half pre-tax profit in H1 as it took a hit from claims inflation.
I recently added this stock to my portfolio despite H1 profits falling to £178.1m from £261.3m in the same period a year ago — although it’s worth noting that profits were ahead of consensus expectations at £155m.
However, I bought this stock for two reasons. Firstly, insurance is often a necessity. And that gives Direct Line a valuable defensive characteristic. Even when the economy is going into reverse, people will still need insurance.
Secondly, Direct Line says it has responded to claims inflations and has pushed prices up accordingly. The group recently said that it has returned to writing at target margins “based on latest claims assumptions“.
And what about the dividends? Well, right now the yield is a huge 11%.
A dividend-paying growth stock
Hargreaves Lansdown (LSE:HL) is one of the closest things the FTSE 100 has to a growth stock. The investment platform soared during the pandemic when Britons were locked in their homes and many started investing.
However, with cafes, bars, restaurants and places of work now open, growth has slowed. But importantly, it’s still growing. In October, it said it had brought in net new business of £700m in the quarter to 30 September, with assets under administration reaching £122.7bn. Some 1.7m people now use the platform.
Yes, the recession presents challenges. Britons are likely to sacrifice investing if incomes are squeezed. But equally, I don’t see these conditions lasting for a long time. Hopefully, we’re only looking at a shallow recession.
Focusing again on the positives. Hargreaves is set to make £200m in the next year as a result of higher interest rates on cash deposits. And in the long run, I see it benefiting as more and more people take personal control over their investments. That’s why I want to buy more of this growth stock that pays a handsome 4.5% dividend yield.
