Throughout the pandemic, growth stocks were firmly in favour. In periods of low interest rates, these companies were able to raise large amounts of debt cheaply and grow their revenues and profits at astronomical rates. But times have now changed, and growth stocks are no longer in favour. This is because of high interest rates and inflationary pressures. Instead, dividend stocks look far more tempting, especially where their yields are higher than inflation. Here are two that particularly excite my interest.
A top-quality miner
Miners are often a good bet during times of high inflation, because the price of materials soars. This happened with Anglo American (LSE: AAL). In fact, in the company’s 2021 full-year report, Anglo turned in underlying EBITDA of $20.6bn, up from $9.8bn the previous year. This was due to the high price of commodities, as both iron ore and copper reached record highs. As the outgoing CEO noted, “these [were] the strongest results [we] ever posted”.
The results also equated to extremely strong shareholder returns, and including share buybacks, Anglo is returning more than $6bn to investors for 2021. At the current share price, the dividend also has a yield of around 6%, rivalling other large dividend stocks. This certainly helps offset some inflationary pressures and is the reason why I’d buy Anglo for my portfolio.
There are some risks to point out though. Firstly, the miner has had a poor start to the year, due to both the re-emergence of coronavirus in many parts of the world and weather-related disruptions. This means that production in the first three months of the year was down 10% year-on-year. Further, the current lockdowns in China have seen the price of iron ore slump recently, which means that last year’s excellent results may have been a one-off. But this has now been recognised in the Anglo share price, which has fallen 10% in the past month (but it’s up 11% in 12 months). Therefore, I’m only slightly concerned by this.
A dividend stock with a yield over 10%
Persimmon (LSE: PSM) is a housebuilder and one of the top dividend-paying companies in the FTSE 100. In fact, last year, the company paid dividends per share of 225p, which at the current share price, equates to a yield of 10.5%. The same dividend is also expected for 2022.
This dividend is also sustainable. In fact, in the full-year results, it reported profit before tax of £973m, far higher than the £863m reported a year earlier. This is mainly due to rising house prices and high demand. At the same time, dividends only totalled £750m, meaning that there’s money left over to reinvest in the company for growth. These are signs of a very good dividend stock.
The main risks include the potential costs the firm may incur for fixing cladding issues on homes. In fact, the firm has already set aside £75m for these purposes, but this amount is set to increase. Further, there’s also the risk that house prices may fall, especially due to rising interest rates. But with a price-to-earnings ratio of under 10, I feel that these issues are priced into the stock, and don’t deter me from buying.