With inflation circling around 10%, I’m relying on dividend stocks to keep my portfolio moving forward. The thing is, picking the right dividend stocks can be tricky. After all, big dividend yields can be unsustainable — especially anything around the 10% mark.
So let’s take a look at two of my top dividend stocks to buy now.
A surging lender
Lloyds (LSE:LLOY) isn’t the most interesting dividend stock out there, I appreciate that. But it offers a solid 4.2% yield and the outlook is very promising for Britain’s biggest mortgage lender.
So why am I so positive on the outlook for this stock? Well, there are several reasons. Firstly, net interest margins (NIMs) — the difference between savings and lending rates — are rising. This is integral to the bank’s profitably.
Higher rates are already having an impact on the bank’s earnings. But rates are likely to go much higher. Some analysts see interest rates reaching as high as 4% in an effort to bring down inflation. This would have a profound impact on revenue generation.
It’s also worth noting that prime minister Liz Truss intends to stop a planned increase in corporation tax. However, there are no plans to scrap a planned reduction on the 8% tax surcharge paid by banks — this is due to come down to 3%.
Naturally, the forecast recession won’t be good for credit quality. But higher interest rates should more than make up for that.
Lloyds has indicated its intention to keep growing its dividend and, maybe with some tailwinds, it’ll be back up to 2018 levels sooner rather than later. I already own Lloyds shares, but I’d buy more today.
A dividend giant
Legal & General (LSE:LGEN) is offering a sizeable 7% dividend yield. And while I’d normally be wary of a yield that high, it looks pretty secure. It can comfortably afford to pay too, with its dividend cover of 1.7 also pretty good (although a coverage of two would be healthier). Moreover, it’s been a regular payer of dividends for over three decades.
The stock’s long-term performance is pretty strong — it has achieved an 11% annual return including dividends over the past decade.
And in the current macroeconomic environment, the firm should do pretty well. That’s because in a high interest rate environment, it has to set aside less capital now to make future pension payments. “We are beneficiaries of rates rising across the world,” Legal & General CEO Nigel Wilson said in a statement.
Broadly, a recession might be challenging for some of the financial services it offers. For example, customers are less likely to pay into a Stocks & Shares ISA when finances are being squeezed. But on the whole, the current environment appears to be providing L&G with a tailwind.
I’ve already added Legal & General to my portfolio, but with the share price around 260p, I’d definitely buy more.