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Stock market correction: why now’s the time to buy dividend stocks!

Front view photo of a woman using digital tablet in London
Image source: Getty Images

Dividend stocks form the core part of my portfolio. They provide me with a regular — but not guaranteed — income in the form of dividend payments.

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

What correction?

2022 was an unfortunate year for many investors, but the FTSE 100 is pretty much flat over 12 months. The thing is, while the lead index has pushed upwards since Russia’s invasion of Ukraine sent stocks tumbling, the recovery has been unequal.

It’s being hauled upwards by surging oil and resources stocks which are well represented on the index. Shell — the biggest company on its list by market-cap — is up 44% over the year. Around £75bn has been added to its share price over the period.

Sectors such as retail, housebuilding, banking and travel are still trading at considerable discounts.

Buying cheap

We all want to buy shares when the price is low and sell when the price is high. That’s the name of the game right?

Well, of course, it’s not just about buying shares that are cheaper than they were a year ago. Stocks are often cheap for a reason. But it’s about finding meaningfully undervalued shares, and that requires research.

However, there’s another reason why I’m buying discounted stocks. And that’s because when share prices go down — assuming dividend payments stay the same — the dividend yield will go upwards. And, of course, when share prices go up — again, assuming dividend payments stay the same — the dividend yield will go downwards.

It’s equally important to remember that the dividend yield is always relevant to the share price I pay for the stock. So if I buy the stock and the share price goes up, my yield will remain frozen unless the dividend payment is upped, or cut.

What I’m buying

With share prices largely depressed, I’m looking at dividend stocks in several sectors to boost my passive income.

Financial institutions are top of my list. I already own stocks in banks such as Lloyds, but I’m looking increasingly at insurance and asset management.

Phoenix Group offers an 8% dividend yield and the firm is on track for a strong year. In an autumn update, the insurer said it expects to deliver around £1.2bn of incremental, organic new business long-term cash generation in 2022.

It also said that cash generation was at the top end of its target range of between £1.3bn and £1.4bn. The stock is down 4% over the past 12 months.

M&G is another company I’m looking to buy. It has a 9.8% dividend yield and analysts estimate it will generate £2.7bn of surplus capital between 2022-24 while its solvency ratio stands at 235%. There’s obviously the risk that people will withdraw their funds, but that’s reflected in the price.

The post Stock market correction: why now’s the time to buy dividend stocks! appeared first on The Motley Fool UK.

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James Fox has no position in any of the shares mentioned. 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 2023