Income stocks form the core part of my portfolio. I receive income from these companies in the form of dividends that are paid throughout the course of the year.
Stocks paying dividends tend to be more established that those often referred to as ‘growth stocks’. They use the profits they make each year to reward shareholders for their investment.
Taking the opportunity
The FTSE 100 is down nearly 5% over the past month, while the FTSE 250 — which is generally considered a better reflection on the health of the UK economy — is down 10%. In fact, since Liz Truss came to office, more than $500bn has been wiped off the value of UK stocks.
But, eventually, the market will recover. In fact, in my opinion, all it would take to push the indexes upwards is some sensible fiscal policy — it’s never good when the IMF criticises the fiscal policy of a G7 nation and suggests the new government should reverse its latest budget.
For me, now is a good time to top up on those stocks I really believe in. And here are two companies — both banks — I’m buying more shares in.
The big lender
Lloyds (LSE:LLOY) shares have plummeted since Truss came into office. The stock is down 11% over the course of the past week, wiping away gains made over the previous month.
The government’s mini-budget — in which it became clear that UK fiscal policy was working at odds with monetary policy — wasn’t well received by the city.
The bank has also fallen on reports that Truss’s new cabinet has looked at changing the Bank of England’s money-printing programme. Interest paid on some deposits held by commercial lenders would be scrapped, potentially saving the state more than £10bn a year, according to those reports.
However, there are positives. Net interest margins (NIMs) — the difference between savings and lending rates — are rising. This is because Bank of England interest rates are on the up, and might even reach 6% next year, due to the PM’s fiscal exuberance.
Higher NIMs are very important for banks. In fact, Lloyds is even earning more interest on the money it leaves with the central bank. And despite falling credit quality — induced by rampant inflation — higher interest rates will more than make up for it.
I already own Lloyds shares, but down 11% over the week, I’d buy more today. The stock also offers a 4.8% dividend yield.
A discounted merchant bank
Close Brothers Group (LSE:CBG) is a FTSE 250 firm provides securities trading, lending, deposit-taking and wealth-management services. The stock is also down 12% since the mini-budget. However, with the share price falling, the dividend yield has pushed upwards and now stands at a very attractive 7%.
Last week, the bank announced that it had performed well in the current climate, but profits had fallen year on year. In the 12 months to the end of July, adjusted operating profits fell 13% to £234.8m. Close Bros said this mainly reflects lower income from market-maker Winterflood Securities and an increase in impairment charges.
However, the firm has strong margins — around 7.8% — and as noted by RBC, has defensive qualities. The group has a consistent track record of earnings, even during recessions.