Income stocks form the core of my portfolio. They provide me with a second source of revenue — in addition to my work — with minimal effort or input. Choosing the right stocks can be the tricky part.
And with inflation now in double digits, I’m looking for income stocks that will help my portfolio keep growing. Huge dividend yields can be unsustainable, so that’s why I’m looking for stocks with juicy, yet manageable yields.
I’ve also got to be aware of the changing economic conditions. We’ve got recession forecasts, double-digit inflation and high interest rates. I need stocks that will continue to perform in these conditions.
So here are three dividend stocks I’m buying for income.
Lloyds
Lloyds (LSE:LLOY) is among my top stocks to buy right now. The UK bank is often seen as a reflection of the health of the British economy. But that doesn’t seem to be the case right now. We’re heading towards recession but banks are making more money than they have done in years.
That’s because interest rates are rising and may even reach 4% in 2023. This means net interest margins (NIMs) — the difference between savings and lending rates — are rising.
Lloyds, which focuses on the UK mortgage market, said in July that net income had surged 65% to £7.2bn for the six months to 30 June. A recession will be bad for credit quality but I think this will be more than made up for by soaring NIMs.
The bank currently trades with a price-to-earnings (P/E) ratio of just 5.5 and has a dividend yield of 4.5%.
Hargreaves Lansdown
Hargreaves Lansdown (LSE:HL) provides a supermarket-style platform for funds and shares. The stock is down a whopping 48% over the past 12 months and its dividend yield has increased proportionately to 5%.
But I’m bullish on this stock for several reasons. For one, the company earns money on clients’ cash deposits. In 2021, Hargreaves generated revenue of around £51m from cash deposits. Higher rates could therefore increase revenue from this area.
I also believe that more and more people are looking to manage their own investments, and Hargreaves Lansdown is the top platform for doing so. In its most recent report, Hargreaves highlighted that it was continuing to grow its client base — which now numbers more than 1.7m — despite economic headwinds.
A deep recession is unlikely to be good for the firm, but I see the current share price as a good opportunity to buy to benefit from long-term trends.
Close Brothers Group
Close Brothers Group (LSE:CBG) is a UK-based merchant banking company that offers financial services to small businesses and individuals. The stock has been on a downwards track over the past year, and is down 36% over the past 12 months.
But I think there are several reasons to be positive on this one. Firstly, interest rates are rising and so are the bank’s NIMs. In a recent update, the business put its NIM at 7.8% and said its loan book was continuing to grow, despite the concerning macroeconomic environment.
The NIM should jump further as interest rates continue to rise and RBC has even highlighted the firm’s defensive qualities. Although, once again, a recession wouldn’t be good for credit quality.
Close Brothers Group currently offers a 6% dividend yield.