Prices are rising sharply, including soaring energy bills and food costs. And the Bank of England recently warned that the UK faces a sharp economic slowdown as it raises interest rates to tackle inflationary pressures.
With a recession looming, I want to own relatively stable dividend shares that have the best chance of protecting my capital and providing some regular passive income.
Stable dividend shares
For that reason, I’m thinking of adding SSE and National Grid to my portfolio. I wouldn’t typically pick these utility shares in strong economic environments as there are many alternatives that could grow much faster. That said, their stable cash flows and relatively reliable dividends would be very welcome in a recession.
They currently yield 4%-5%, and have regularly been paying dividend income to shareholders for almost three decades. That’s an impressive track record.
Defensive pick
I’d also consider buying BAE Systems. This FTSE 100-listed global defence business could be relatively resilient in the face of a slowing economy.
In the four years from 2020 to 2024, the UK annual defence budget is expected to grow from £42.4bn to £48.6bn. And as a result of Russia’s invasion of Ukraine, I’d expect global spending in this sector to rise further. But it’s still too early to say if new defence spending would be temporary or a more permanent shift.
Either way, BAE offers a 3.4% dividend yield and it has been a regular dividend-payer for over 30 years. I like that kind of reliability.
8% dividend yield
Next, I’d want to own Imperial Brands. As the world’s fourth largest tobacco company, it owns several popular consumer brands. This business is highly cash-generative. As such, it can afford to pay a relatively generous dividend yield of 8.2%. That’s far greater than the average FTSE 100 yield of 3.8%.
I’m often cautious of high dividend yields. That’s because there is a chance they can be cut or suspended. But in Imperial’s case, its earnings more than cover its dividend requirements. And it has a 25-year track record that highlights its reliability.
It has a strategy that focuses on profitable western markets in addition to faster-growing next generation products. Bear in mind that trends are changing, so Imperial will need to continue to innovate and adapt to thrive in future.
Cash, cash, cash
Lastly, I’d like to buy oil giant BP. Soaring oil prices are creating bumper profits for the global oil companies. It recently reported profits of $6.25bn. That’s more than double the $2.6bn it reported last year.
The FTSE 100 oil major is generating tremendous cashflow. That has resulted in a 4% rise in its first-quarter dividend and a $2.5bn share buyback. It currently yields 4.2%.
A deep global recession could result in lower oil prices and it’s a factor that I’m watching closely. Overall though, I reckon these dividend shares provide reliable income and they are on my buy list today.