Stock market correction: I’d start hunting falling income stocks to lock in big yields

Dr James Fox explains why he’s now searching for income stocks with considerable and sustainable yields amid a challenging economic backdrop.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged black male working at home desk

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Income stocks form the core part of my portfolio. These stocks provide me with a regular, albeit not guaranteed, income in the form of dividends.

So why do I think now is a good time to buy more income stocks?

Correction? What correction?

Some people might ask what correction? The FTSE 100 is actually up marginally over the past 12 months. But the reality is that the index has been dragged upwards by surging resource stocks while much of the index is down.

Should you invest £1,000 in Babcock right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Babcock made the list?

See the 6 stocks

For example, Shell, the biggest stock on the index by market value, is up 40% over 12 months. The index has a disproportionate number of resource-focus stocks.

The FTSE 250 is down 20%, and this is more reflective of the health of UK stocks. Sectors such as retail, housebuilding, banking and travel are still trading at considerable discounts.

This is especially the case for stocks that are UK-focused, as many parts of the global economy are performing better than here.

Dividend yields

The dividend yield is a financial ratio that tells me the percentage of a company’s share price that it pays out in dividends each year. And when share prices fall, dividend yields go upwards — assuming dividend payments remain constant. Naturally, it works the other way too.

So by investing when share prices fall, I can lock in a higher dividend yield for the long run.

It’s also important to remember that stock market corrections don’t happen all that often, although the last few years has been somewhat of an exception.

Personally, after the shocks of the pandemic and Russia’s invasion of Ukraine — and the associated economic fallout — I’m buying now as I’m conscious that there might not another opportunity like this for some time.

Sustainable yields

With share prices falling across multiple sectors, we’ve seen some really big yields this year. But some aren’t sustainable.

For example, Persimmon‘s yield reached 20% in the autumn as the share price halved. However, even in 2021, the firm’s dividend coverage ratio indicated it only just has enough income to pay its shareholders. So as the operating environment grew less favourable this autumn, Persimmon cut its dividends. 

The dividend coverage ratio (DCR) is a useful tool to assess the sustainability of a yield. A DCR above two is healthy, anything around one is concerning.

For me, some of the best and most sustainable yields appear to be in the financial services sector right now. I’ve recently bought shares in Phoenix Group and Direct Line Group.

The former offers a 7.88% dividend yield and the firm is on track for a strong year. The insurer said in an autumn update that it expects to deliver around £1.2bn of incremental, organic new business long-term cash generation in 2022. 

The latter offers a huge 10% yield, and after a challenging start to 2022, is now back to writing at target margins.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Persimmon Plc, Phoenix Group and Direct Line Insurance Group. 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.

More on Investing Articles

Investing Articles

Should I load up on Rolls-Royce shares after the 17% drop?

Rolls-Royce shares have pulled back sharply in the FTSE 100 in recent weeks, leaving this Fool to wonder if he…

Read more »

Investing Articles

Is this the best S&P 500 stock to consider buying in these volatile times?

With bullion prices still rocketing, I think buying the S&P 500's only gold stock is worth serious consideration right now.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Yielding 7.25% but with a P/E of 186x! What’s up with the BP share price?

Harvey Jones thought the BP share price was a brilliant bargain but it's only brought him a world of trouble.…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Down 26% with a 7% yield! Could this little-known FTSE 250 gem make a comeback?

Mark Hartley considers the long-term prospects of FTSE 250 recruiter Page Group. Weak results have sent the price tumbling but…

Read more »

Investing Articles

Analysts are calling Diageo shares a strong buy! Are they mad?

Analysts still have faith in Diageo shares, with 10 of them giving it the highest possible stock rating. Harvey Jones…

Read more »

Investing Articles

Up 17% in 2 days! At last, some good news for those interested in the JD Sports share price

The JD Sports share price jumped after the company said trading was in line with expectations. Our writer considers what…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Is this FTSE 250 retailer a falling knife or a bargain buy?

Our writer Ken Hall has an under-pressure FTSE 250 retailer on his radar. Is it a bargain hiding in plain…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Building a second income stream in 2025 is now more important than ever

With the backdrop of today's economic landscape, Mark Hartley investigates the importance of a second income and how to build…

Read more »