Dividend shares are an important part of my portfolio. In fact, they’re the largest part, providing me with a regular, albeit not guaranteed, source of income.
While the FTSE has been recovering in recent weeks, some areas of the market are still depressed. And that’s where I’m looking today. So here are two cheap dividend shares that could provide me with long-term passive income. Will I buy them?
I already hold NatWest (LSE: NWG) shares. For the last decade, banks have operated in a lower-margin environment. This is because the Bank of England (BoE) base rate had been near zero for the past 12 years in an attempt to stimulate economic growth.
Right now, higher rates are a huge tailwind for banks. The BoE has hiked rates to 3% already and it’s likely to go higher in 2023. In Q3, the bank said its net interest margin — the difference between savings and borrowing rates — improved to a better-than-expected 2.99%.
With inflation looking pretty sticky in the UK as a result of Brexit, Covid-19 and an ever-shrinking labour market, interest rates could remain higher for longer.
However NatWest isn’t performing as well as one would think. That’s because of bad debt provision as the UK moves towards recession. At the end of Q3, the FTSE 100-listed firm said provisions for bad loans were £247.0m, significantly higher than consensus estimates of £163.4m.
With the stock down 13% over three months (up 3% over the year), I’m buying more NatWest stock for my portfolio. I see the next decade being more profitable on the back of higher (than near-zero) interest rates. The dividend yield currently stands at 4.6%.
If I’m investing for the long run, I shouldn’t worry too much about short-term fluctuations. Right now, Vistry Group (LSE: VTY) , along with other housebuilders, is trading at a considerable discount. In fact, the stock is down 42% over the past year. And as the share price has fallen, the dividend yield has grown. It currently stands at 8.9%.
The issue right now is that house prices will remain flat, as interest rates rise, while cost inflation will run at 5%. That’s clearly an issue and it’s likely to impact housebuilders right through 2023.
However, in the long run, I’m confident demand will return. Especially when interest rates steady out. The thing is, right now, everyone know rates are rising, so it can appear logical to postpone one’s decision to buy.
There’s also the fact that the UK has a dearth of homes, and therefore, I’m confident demand will return.
But as an investor, I’m buying more Vistry stock now. That’s because the dividend yield is always relevant to the price I paid for the stock. Dividend payments might be cut next year but, in the long run, I think they will recover. And the yield will too.
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James Fox has positions in Vistry and NatWest. 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.
Motley Fool UK 2022