Last year, in the low-interest rate environment, investors profited hugely from growth stocks. However, many of these gains have now been wiped out, as growth stocks around the world have crashed.
Alternatively, dividend stocks have fared far better as investors attempt to offset the issues of inflation with large dividend yields. Here are two dividend stocks I’d buy at the moment, in my plan for passive income.
Insurance giant
Legal & General (LSE: LGEN) has been one of my favourite dividend stocks in the FTSE 100 for a long time. Indeed, over the years, the insurance company has managed to boost its profits, and this has translated into large dividends.
For instance, in 2015, the firm’s total dividend amounted to 11.8p per share, yet this has been raised year-on-year, and it now totals 18.45p per share. It is also expected that it will be able to grow further in the next few years.
These dividend increases, combined with the recent decline in the L&G share price, means the dividend currently yields 7.2%. This will certainly help offset inflationary pressures.
Another reason I’m particularly keen on LGEN shares is the sustainability of the dividend. In the recent full-year results, profits after tax climbed 28% year-on-year to reach over £2bn. Conversely, the total cost of the dividend only totals around £1bn, meaning that there is still plenty of cash left over for reinvestment.
There are some risks however. For example, as an insurance company, the LGEN share price is linked heavily to the UK economy. The fear of a UK recession is, therefore, a factor which could see the company’s share price sink. Despite this, with a price-to-earnings ratio of just 7.5, I believe these risks are well factored in. Therefore, I’ll continue to buy this insurance giant.
A tobacco dividend stock
Although tobacco stocks do not fulfil the criteria for many ESG investors, they are renowned for their strong dividends. British American Tobacco (LSE: BATS) is a prime example. Indeed, the company’s dividend currently yields over 6%, and there is a dividend cover of 1.5. This means it is well-covered by profits, and the firm does not need to issue debt to cover payments. This is a sign of a strong dividend stock.
BATS is also proving resilient to the current issues of inflation. This is because it can raise the prices of its products, and consumers are likely to continue buying them. As such, the firm should be able to offset any increased costs resulting from inflationary pressures. This adds to the sustainability of the dividend.
One key risk is the long-term future of the company, as tobacco becomes less and less popular. In this respect, the company is relying on its next-generation products, considered a healthier alternative. However, many doubt that these products will be able to fully offset lost revenues from the traditional tobacco business, and this could result in declining profits.
Even so, with a price-to-earnings ratio of under 10, I’d be willing to take this risk and open a small position in BATS. Its inflation-resistant nature makes it a great pick in the current macroeconomic environment.