Income stocks are well represented within my portfolio. These companies provide me, as a shareholder, with regular income in the form of dividend payments. However, it’s worth remembering that these payments are by no means guaranteed.
So why do I think now’s a good time to buy income stocks? Let’s explore.
Stock market correction
Investors may be forgiven for thinking there hasn’t been a stock market correction. After all, the FTSE 100 recently pushed above 7,700.
However, that’s only part of the story. Resource stocks, which are well represented on the index, have surged, while most UK stocks have suffered.
Naturally, I’m looking at the fallen part of the market. This is because when share prices fall, dividend yields go up — assuming dividend payments remain constant — and vice-versa.
So unless the dividend isn’t sustainable, it could pay me to buy now. And the thing is, corrections like this don’t happen all that often. So with the Economic Forecast Agency suggesting the FTSE 100 could reach as high as 9,727 in May, there’s even more reason for me to buy now.
What am I buying?
So I’m looking for stocks with sustainable dividends and ideally ones trading at a discount, because I want to see the share price grow over time.
I’m starting with Legal & General which has a strong dividend coverage of 1.85 and a dividend yield of 7.8%. That’s considerable, and something that could help my portfolio growth through a compound returns strategy.
L&G reiterated its full-year guidance, despite the recessionary environment, with operating profit growth in line with the 8% it delivered in the first half.
The firm is also a net beneficiary of rising interest rates and, in the long run, from pension risk transfer (PRT). Companies are increasingly turning to Legal & General to manage their defined benefit (DB) pension plans.
I’ve bought more shares in this financial services outfit before the New Year.
Another firm I’ve recently bought more of is Close Brothers Group. Down 22% over the year, the merchant bank now offers a 6% dividend yield and had dividend coverage of 1.7 in 2022. Moving forward, the recession is a risk to debt, but the firm’s defensive qualities have been touted frequently in recent months. I also see the post-2023 future as being very bright.
Compound returns
What about getting rich? Well that’s where my compound returns strategy comes in. If I reinvest my dividends over the next decades, I could transform my wealth.
For example, if I invested £20,000 in these stocks, with an average 8% yield, after 30 years I’d have £218,000. That could make a huge difference to my retirement. And that’s thanks to these higher yields.
But if I invested just £200 a month during that period, I could hugely grow my pot. After 30 years, I’d have £516,000. We’ve all got our own definition of being rich, but half a million will suit me nicely.
