Dividend stocks form an important part of my portfolio. They provide me with regular income in the form of dividend payments. This passive income source is the holy grail for many investors, particularly those investing over the long run.
UK indexes have fallen over the past two months, particularly after Liz Truss spooked markets with her catastrophic fiscal policy. Both the FTSE 100 and FTSE 250 are down considerably from summer highs. And when share prices fall, dividend yields go up — unless the company reduces dividend payments.
There’s obviously concern that we’re entering a recessionary environment and there will be further negative pressure on stocks. But, for me, these two stocks look well positioned to outperform the market and provide me with passive income.
I think housebuilder stocks have fallen far enough. Vistry (LSE:VTY) grew impressively in 2021, with revenue coming in at £2.3bn, more than double any year before the pandemic.
And this growth has continued in 2022. Adjusted revenues in the six months to 30 June rose nearly 6% to £1.33bn, while total completions improved 5% to 5,409. Adjusted operating profits were ahead 13% at £198.2m.
However, with the economic climate worsening, and interest rates being hiked, the share price has tanked. In fact, Vistry is down 50% over one year. That’s huge, but in line with other housebuilders.
The issue is that analysts contend house prices will remain flat while cost inflation will run at 5%. That’s clearly an issue and it’s likely to impact housebuilders right through 2023.
But in the long run, I’m confident demand will return. And after a bumper two years, housebuilders should have the resources to see these troubled times through. Vistry has a debt to total capital ratio of 12.5% — a lower figure than the previous year’s 14.6% — and a net profit margin of 9%.
The stock, which is also the target for a proposed merger with Countryside Partnerships, also offers an attractive 10% yield. With 2022 still expected to be a record year, I anticipate the yield to remain constant for the time being. I already own Vistry shares, but I’m buying more.
Direct Line (LSE:DLG) posted a 31.8% decline in first-half pre-tax profit in H1 as it took a hit from claims inflation. Pre-tax profit fell to £178.1m from £261.3m in the first half a year earlier, although this was ahead of consensus expectations of £155m.
As a result of the above, the insurer is now down 31% over the year. However, I see this dip as an opportunity to add this stock to my portfolio. Regardless of a possible recession, people will still need or want to insure their homes and vehicles.
And this is something the business has highlighted. The group contends that its fundamentals remain strong and that through steps taken within its garage network, as well as pushing up prices, Direct Line has returned to writing at target margins “based on latest claims assumptions“.
I’m buying Direct Line because of these defensive qualities, but also its sizeable 11% yield. Even if payments are cut, proportional to the decline in H1 profits, it will still remain above the index average.
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James Fox has positions in Vistry. 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