Passive income is the holy grail of investing for many. And we can achieve this by investing in dividend stocks. So why do I think this recent stock market correction is a great opportunity to enhance my portfolio’s passive income generation?
Let’s take a closer look.
Buying when prices fall
When share prices fall, dividend yields — assuming the dividend payment remains constant — go up. And when share prices go up, yields go down.
So it makes sense to buy when share prices fall as it allows us to lock in better yields for the long run. After all, my yield is always a reflection of the price I pay for the stock.
Why now?
At the beginning of the last week, stocks tanked. In fact, they sunk even more than they did after Liz Truss’s budget. The catalyst was a run on Silicon Valley Bank. The tech-backing bank collapsed after investors were made aware of losses on bonds.
Risks of contagion were put to bed pretty early — most banks don’t deal in the high-risk part of the market that SVB does.
However, then there were concerns that other banks were sitting on unrealised losses. But this is also likely overplayed. SVB tripled its US bond holdings in 2021 when interest rates were low. Other banks have more diverse holdings, and are better capitalised.
So will there be a run on the banks? No. Do I need to worry about unrealised losses? It seems unlikely, and this is something that only really impacts financials.
What can I buy?
Falling prices across the board mean higher dividend yields. And the area where share prices have fallen the most is finance and banking.
So with major UK banks down around 10% since the SVB fiasco, at the time of writing, I’m looking at topping up my positions. There’s not denying that banks are seen as risky investments right now. But I’m buying more HSBC (4.8% dividend yield), Lloyds (5.1% dividend yield), and Barclays (4.8% dividend yield).
I’d add that Lloyds’ dividend will push upwards with the yield due to extend above 6% in 2024 at the current price.
Moreover, all UK-listed banking stocks trade at multiples considerably below the index average. In fact, Lloyds trades with a price-to-earnings ratio around half the index average.
I think we may now see central bank rates rise more slowly following the SVB fiasco. The Bank of England and the government don’t want to tip banks into a state of chaos. I’d expect slower rates rises and maybe a lower terminal rate as a result.
Additionally, I’m buying more shares in Hargreaves Lansdown. It reported lower profit in its last full year and it has a premium valuation, which is a risk. But the investment platform provides a 5% dividend yield, while offering considerable growth prospects. And its pre-tax profits surged in its recent first half. Hargreaves is the UK’s number-one investment platform and is well-positioned for a boom in portfolio self-management.
