UK inflation hit a 40-year high of 9% in April, according to the latest official figures. With prices surging, I’m looking for dividend stocks with the potential to provide extra income and long-term growth.
The three companies I’m looking at today all offer dividend yields between 6% and 9%. I think they could be good buys for my portfolio in this difficult market.
A safe 9% yield?
UK financial stocks in general are currently out of fashion, but I think that rising interest rates could benefit many of these businesses.
One FTSE 100 financial stock that’s caught my eye is pension and asset management group M&G (LSE: MNG). This UK-focused business was spun out of its former parent Prudential in late 2019.
UK-focused M&G is a fairly mature and slow-growth business. One risk is that it could fail to find new areas of growth. However, recent changes and targeted acquisitions suggest to me that CEO John Foley will find ways to expand the business.
In the meantime, I expect M&G to continue paying generous dividends, thanks to its strong cash generation. Broker forecasts suggest a payout of 19.5p per share in 2022, giving a 9% yield. This bumper yield looks fairly safe to me, so I’m tempted to add this big dividend stock to my portfolio.
This 6%-yielder could be cheap
Vodafone Group (LSE: VOD) has just attracted a major new backer. UAE telecoms group e& (formerly Etisalat) has taken a 9.8% stake in the UK-based business.
e& says it sees Vodafone’s current share price as “a compelling and attractive valuation”. The Middle Eastern business expects to profit from the investment through “potential capital gains and dividends”.
I’m positive about Vodafone too. This week’s full-year results showed revenues up 4% to €45,580m, with operating profit up 11% to €5,664m. The dividend was held at 9 eurocents a share, giving a well-supported 6.4% yield.
Vodafone boss Nick Read has done a good job so far, in my view. But he’s now coming under pressure from investors to find a way to improve the profitability of the business.
I agree that growth and profitability have been too low. But performance is starting to improve and I expect further progress. In the meantime, I think Vodafone shares could be cheap, on just 12 times forecast earnings.
A top retail dividend stock
My final pick is homewares retailer Dunelm Group (LSE: DNLM). Sales and profits boomed at this family-controlled business during the pandemic, as locked-down Britons upgraded their homes.
Slightly to my surprise, progress has stayed strong so far this year. Dunelm’s sales for the nine months to 26 March were 25% higher than the year before – and 37% higher than before the pandemic.
Dunelm shares have fallen by nearly 40% over the last year, as investors have priced in a post-pandemic slowdown. Although broker forecasts suggest profits will flatten out over the coming year, I reckon the stock’s price/earnings ratio of 11 now looks too cheap.
In my view, Dunelm is one of the best quality UK retailers, with high margins and good cash generation. Current forecasts give the shares a dividend yield of 6% for 2022/23, with a return to growth the following year.
I’ve been buying Dunelm for my portfolio.