Income stocks form a core part of my portfolio. In fact, at this moment in time, these stocks are particularly important as inflation threatens to undermine the value of my investments.
But also income stocks are part of my long-term strategy to build wealth using passive income while reinvesting the dividends I receive. This strategy is called compounding returns, or compounding interest.
Over time, I could grow my portfolio without exposure to riskier growth stocks. Instead, this strategy allows me to focus on value stocks with strong but sustainable returns.
So here are three income stocks I’m buying for the long run, to help me build wealth and retire early.
Legal & General
Legal & General (LSE:LGEN) stock is trading at a fraction of its year high. The share price tumbled following the Russian invasion of Ukraine. Today, Legal & General is trading for 245p, down from 309p.
The multinational financial services firm recently raised its dividend on the back of a 39% rise in annual pre-tax profits. This rose to £2.49bn, while profit after tax was up 28% to £2.05bn.
The dividend yield currently sits at a whopping 7.5%. Last year, the dividend coverage was 1.85. That’s pretty healthy, although a rate above two would be even healthier.
There might be some near-term challenges. Any company in the investment space may perform poorly amid the soaring inflation and cost-of-living crisis.
But Legal & General is a massive financial services company and I don’t see it disappearing any time soon. It may need to evolve to keep up in a changing world but, broadly, I see this firm being here for the long run. That’s why I see it as a good addition to my compound returns strategy.
Lloyds
Lloyds is among the cheapest of the banking stocks to buy right now. And banking stocks are unlikely to disappear in the coming years, although I appreciate that it has happened before.
It has an attractive dividend yield of 4.2% and is currently trading with particularly low multiples. It’s price-to-earnings (P/E) ratio is 5.7. Lloyds currently trades with a lower P/E than its peers, and I think that reflects the bank’s weighting towards the property market.
In the near term, the property market might see some pain. But in the long run, I think it’s a strong focus for this institution.
Unilever
Unilever is a fasting-moving consumer goods company. It owns a wealth of famous brands such as Ben & Jerry’s, Dove and Persil.
The firm has been going through a period of underperformance, but I think its long-term prospects are positive, primarily due to the strength of the brands it owns.
It currently offers a 3.7% dividend yield. That’s not great compared with other FTSE 100 stocks, but it is stable. Although, it is worth noting that the firm recently posted its “fastest underlying sales growth for nine years“.
In the short term, I’d also highlight that despite the weakness of the UK economy, Unilever makes a lot of its money overseas. The weakness of pound should inflate earnings here.