Right now is certainly an interesting time to be investing in income stocks. That’s because dividend yields, on the whole, are getting larger.

Some companies, including those explored below, are coming off the back of strong years, but there are concerns about the macroeconomic environment in the coming months.

So, with dividend payments remaining constant or rising and share prices falling, yields have risen. However, big yields can be a warning sign. So, can these stocks maintain their big yields or should I stay clear?

The biggest yield on the FTSE 100

Persimmon (LSE:PSN) has the highest dividend yield on the FTSE 100 — around 20%. That means it would only take five years to get my investment back assuming the dividend yield remained the same in the coming years.

But there are some dark clouds surrounding the housebuilding sector. Interest rates are rising and prices appear to have peaked. This isn’t positive when cost inflation is running at 5%.

However, I feel that these issues are more than priced in. In fact, Persimmon is trading near its lowest point in eight years despite having a stellar 2021 and H1 of 2022. And long-term demand for housing in the UK is likely to remain strong. After all, there is an acute shortage.

There’s also the matter of the fire safety pledge. While some housebuilders are losing a year’s worth of profits to recladding houses, Persimmon’s spend is only equivalent to 10% of 2021 income.

I already own Persimmon stock, and it hasn’t been good to me, but trading below 1,300p, I’d buy more. The dividend forecast for 2023 is 225p, down only 10p from 2022. But even if the dividend were halved, I still see this as a good return and far above the index average.

A big yielding bank

A 7% yield might sound small compared to Persimmon, but it’s still an excellent return on my investment. Close Brothers Group (LSE:CBG) provides securities trading, lending, deposit-taking, and wealth-management services. 

The FTSE 250 firm is currently trading at its lowest point in nearly 10 years. However, the firm has strong margins — around 7.8% — and as noted by RBC, has defensive qualities. And with interest rates rising, you’d expect the bank to be able to expand margins further, but that can work two ways.

Naturally, a deep recession and much higher interest rates may dampen demand for its services. And that wouldn’t be good for business. However, hopefully, especially with a more fiscally responsible prime minister at the helm, we can expect less turmoil.

Once again, I already own Close Brothers Group shares. But as the shares are trading under 1,000p for the first time in nine years, I’d buy more today.

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.

Today, I’m looking at passive income stocks that are trading at knockdown prices. In addition to handsome dividend yields, inflated by falling share prices, I think these stocks also have growth potential in the medium-to-long term.

So let’s take a closer look at three knocked down dividend stocks I’d buy today.

Hargreaves Lansdown

Hargreaves Lansdown (LSE:HL) is a supermarket platform for stocks and funds. The firm, down a huge 41% over the past year, currently has a dividend yield of 4.6%.

The stock collapsed as it struggled to maintain its pandemic-era momentum into 2022. But evidence suggests it’s outperforming other financial services firms as it registered continued net inflows of cash and new customers in the first six months of the year.

While Hargreaves has a strong passive income offer. It is also, arguably, one of the most promising growth stocks on the FTSE 100. More and more people are taking control over their investments and Hargreaves is the UK’s top platform for doing so.

Although a deep recession might hurt new business, in the long run I’m backing Hargreaves.

Close Brothers Group

Close Brothers Group (LSE:CBG) is a UK-based merchant bank. The FTSE 250 firm provides securities trading, lending, deposit-taking and wealth-management services. It’s down a considerable 33% over the past 12 months and this has pushed the dividend yield up to 5.8%.

RBC recently noted that Close Brothers Group had defensive qualities, as it has a consistent track record of earnings, even during recessions. In fact, its loan book has continued to grow despite interest rates rising and a cost of living crisis.

In the first 11 months of its financial year, the annualised net interest margin remained strong at 7.8%, up marginally on the 7.7% recorded last year.

Once again, a deep recession and much higher interest rates may dampen demand for its services. But higher rates also translate to higher margins. I’ve already bought this stock for the dividends and defensive qualities.

Vistry Group

Housebuilders have taken a hit over the past year. Vistry Group (LSE:VTY) is down 40%, despite 2022 expecting to be a record-breaking year for the developer.

Vistry, formerly known as Bovis Homes, expects full-year pre-tax profits to come in around £417m, despite an exceptional £71.4m related to legacy cladding and fire safety. This forecast profit is £98m ahead of 2021 and broadly equal to the pre-tax profits achieved in 2018, 2019 and 2020 collectively. So it’s certainly a growing developer.

House prices are predicted to cool a little in the coming months as interest rates rise and as the cost of living crisis bites. And this will be an issue for developers and their margins. But in the long run, I see plenty of demand for property. That, and Vistry’s 8.1% dividend yield, is why I’m buying this stock.

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.

Interest rates are on the rise and that’s good for banks’ margins. It might slow new business, but existing customers will be paying more to service their loans, including mortgages.

And with inflation tipped to hit 18%, interest rates really could go a lot higher than most are expecting. In fact, Bloomberg suggests UK interest rates could go as high as 4% next year.

Interest rates in the UK haven’t been that high since 2008. And while these are a response to the soaring levels of inflation, I think, in the long run, rates will be higher than we’ve seen over the past decade.

And as net interest margins (NIMs) — the difference between savings and lending rates — rise, I think these two banks could raise their dividend payments accordingly. Moreover, banks don’t tend to fail that often. In fact, both of the ones below were founded in the 18th century.

So here are two discounted banks, both with sizeable dividend yields, that I’ve recently bought to enhance my passive income earnings, now and for years to come.

Close Brothers Group

Close Brothers Group (LSE:CBG) is a merchant banking company that offers financial services to small businesses and individuals in the UK. The FTSE 250 firm provides securities trading, lending, deposit-taking and wealth-management services. Specific offerings include financing for car buying, property development, and asset purchases.

The share price is currently 29% down over 12 months. But I think that discounted share price is a good entry point. Its loan book has continued to grow despite the macroeconomic environment and that its NIM is a sizeable 7.8% — albeit only a slight rise on last year.

But with interest rates going up, I’d expect Close Brothers’ NIM to grow further. The loan book may slow down if rates continue to rise, but there is plenty of resilience here. RBC recently highlighted the bank’s defensive qualities as it has a consistent track record of earnings even during recessions.

It currently trades with a price-to-earnings (P/E) ratio of just 7.6. It also has a dividend yield of 5.5%.

Lloyds

Some 61% of Lloyds‘ (LSE:LLOY) loans were mortgages last year. That’s a fairly safe part of the market, in my opinion. But with rate rises, it could be a highly profitable one.

Lloyds recently said its NIM was now expected to be greater than 280 basis points. And the bank’s NIM has responded quickly to higher rates. At the end of the second quarter, the net interest margin stood 30 basis point above where it was during the last quarter of 2021.

Several brokerages have reiterated their positivity on Lloyds in recent months. Analysts at Bank of America upped their price target to 60p and highlighted the robustness of the UK bank’s credit quality.

Although recession forecasts won’t be good for credit quality, I think higher interest rates will more than make up for that.

Lloyds has a P/E ratio of 5.9 and a dividend yield of 4.6%. I can see dividend payments increasing if net interest margins continue to rise.

Today I want to look at three of these companies, all with dividend yields over 5%.

10% yield from a household name?

My first pick is home and motor insurer Direct Line Insurance Group (LSE: DLG).

This well-known firm has a big share of the UK market, but conditions are difficult at the moment. Soaring used car prices and repair costs have put profits under pressure.

Direct Line’s share price fell recently, after the company has admitted that profits would be lower than expected this year. This slump has left the stock with a tempting 10% dividend yield.

How safe is this bumper payout? In my view, Direct Line can probably hold its dividend if the group’s profitability recovers next year. CEO Penny James says this should happen, as insurance price rises feed through.

The main risk I can see is that it will take longer than expected for profits to recover. If that happens, I think a dividend cut could be needed.

Personally, I’m happy to accept the risk of a cut. I think Direct Line is a good business with a solid future. On balance, I think the shares offer good long-term value at this level.

Profit from market volatility

Financial trading firm IG Group (LSE: IGG) is best known for its spread betting and CFD services, which are popular with UK retail investors.

I’ve owned this stock for several years and it’s served me well during uncertain times. Profits hit record levels during the pandemic, as volatile markets boosted trading activity.

IG is the market leader in this sector. The group boasts an operating profit margin of more than 40% and strong cash generation. However, the maturity of the UK market means that growth opportunities at home may be limited.

To address this, CEO June Felix has bought US options trading firm tastytrade to use as a launchpad into the US market. If she’s successful, then I think the potential growth is huge. The risk is that the US market is tough and competitive — success won’t be easy.

The good news is that I don’t think the market is pricing in much US growth yet. IG shares trade on just nine times forecast earnings, with a dividend yield of nearly 6%. I view the stock as a buy for income.

An underrated bank

My final pick is FTSE 250 merchant bank Close Brothers (LSE: CBG). This £1.7bn bank specialises in commercial lending, car finance, and stockbroking. It’s not exactly a household name, but Close has been in business since 1878 and is well-respected in the City.

Until 2020, Close Brothers hadn’t cut its dividend for more than 30 years. The payout is already back to 97% of its pre-pandemic level, with a further increase pencilled in for the year ahead.

Like all banks, Close Brothers faces the risk of rising bad debts if the UK goes into recession. But the company’s long track record and solid profitability suggest to me that the situation will be manageable.

With a 5.7% dividend yield and long-term growth prospects, Close is on my buy list.

The FTSE 250 is in a bear market

The FTSE 250 index is actually in a bear market, having fallen over 20% from its previous high. The index hit an all-time peak of 24,353.85 points on 7 September 2021. On Friday, it closed at 18,833.80 points, down 5,520.05 points (-22.7%) from this record high. Yikes. Over the past 12 months, the FTSE 100 is up 4.6%, while the FTSE 250 is down 14.2%.

Bargain-hunting for cheap stocks

My wife and I amassed a hefty cash pile from taking profits in 2021-22. We’ve begun reinvesting this nest egg into a standalone portfolio of cheap shares in quality businesses. So far, we’ve bought six new FTSE 100 shares in three weeks.

However, noting the FTSE 250’s decline, I’ve started looking outside of the Footsie for lowly rated stocks. I’ve used various stock screeners to hunt down mid-cap ‘value shares’ (those trading on low price-to-earnings ratios and high dividend yields). And I’ve found one candidate that I’ll suggest to my wife as a potential steal. The cheap share that has caught my eye is Close Brothers Group (LSE: CBG).

I like the look of Close Brothers

This is a merchant-banking firm that provides securities trading, lending, deposit-taking and wealth-management services. The FTSE 250 firm is divided into five segments: Commercial, Retail, Property, Asset Management, and Securities. The business — which has been around since 1878 — employs around 3,500 people.

It deals with both individuals and small/medium-sized businesses, providing finance for asset purchases, property development, car buying, and insurance. It also offers financial advice and investment management to UK private clients.

Why I’m drawn to it

I like its resilient, widely diversified business model and income streams. To me, it looks like a mini-version of a retail/commercial/investment bank like, say, Barclays. It also owns leading market maker Winterflood Securities (this buys and sells shares for its own account to provide market liquidity), which made bumper profits during 2020-21’s market volatility.

But what really grabs me is its undemanding fundamentals. Here they are, based on Friday’s closing price.

Close Brothers shares are down almost a third over the past 12 months. As a veteran value investor, this has aroused my interest. However, there’s no doubt in my mind that we face a period of heightened financial volatility and uncertainty. Even so, this stock looks too cheap to me.

Currently, it trades on a lowly price-to-earnings ratio of 7.7, which translates into an earnings yield of 12.9%. This is more than double the stock’s generous dividend yield of almost 6.2%. Thus, even if the group’s earnings were to slide in 2022-23, this cash yield looks pretty safe to me. That’s why I intend to buy this cheap share next week. And that’s despite my worries about red-hot inflation, rising interest rates, war in Ukraine, and a global recession!

Today, I’m going to look at three UK dividend stocks I’m keen on, two of which I already hold in my Stocks and Shares ISA.

£1bn spare cash

FTSE 100 housebuilder Barratt Developments (LSE: BDEV) expects to report at least £1bn of surplus cash when its financial year ends on 30 June. This should provide comfortable support for the group’s forecast dividend yield of 7.8%.

Indeed, my sums suggest that Barratt could maintain its dividend for nearly three years with this level of cash. Of course, that’s unlikely to be necessary. By 1 May, Barratt was fully sold out for the year ending 30 June.

In total, Barratt has forward sales of £4.4bn on its books. Its new home build rate and sales reservation rate are both around 10% higher than a year ago.

The big risk here is that inflation and rising interest rates could see the UK fall into recession. That could slow new home sales and put pressure on prices.

However, the Barratt share price has already fallen by 35% over the last year. That’s left the stock trading in line with its book value, on just six times forecast earnings.

I think there’s a margin of safety here, so I’d be happy buying the shares for income.

The best UK bank?

Close Brothers Group (LSE: CBG) isn’t a household name like Lloyds or Barclays. But unlike its famous peers, this FTSE 250 merchant bank didn’t cut its dividend during the financial crisis. Although the payout did drop in 2020, it’s already returned to pre-pandemic levels.

This group specialises in commercial lending and motor finance. It also has a stockbroking business, Winterflood Securities. This proved useful during the pandemic, when volatile stock markets led to bumper profits from share dealing. This helped to offset a temporary dip in lending profits.

Like Barratt, Close Brothers is exposed to the risk of a UK recession, which could lead to loan losses and a slump in new lending.

However, Close is far more profitable than the big high street banks and has been in business for 144-years. With a forecast dividend yield of 6%, I’m tempted to top up my holding.

I can’t ignore this 6.9% yield

Tobacco stocks have a reputation as good income shares. British American Tobacco (LSE: BATS) offers a tempting 6.9% dividend yield that’s covered by earnings. The group’s dividend payout hasn’t been cut for at least 20 years and continues to look very safe to me.

Of course, investing in tobacco carries ethical issues, plus the real risk that sales could be more heavily restricted in the future.

However, BATS is ahead of some rivals in terms of adopting lower-risk products. Sales of non-combustible products such as vapes rose by 51% to £2,178m last year. Management expects this figure to reach £5bn by 2025 – around 20% of total sales.

The BATS share price looks cheap enough to me to reflect the risks of investing in tobacco. The stock currently trades on just nine times forecast earnings and offers a jumbo 6.9% dividend yield. I’m happy to buy and hold the shares in my ISA at this level.

A renewable energy share to buy now

The first company I like is Contour Global (LSE:GLO). The energy supplier sits in the FTSE 250. I think it’s a great share to buy now following the recent release of 2021 results. There was much to like in the report, with the business making a strong push towards renewable energy. Even though thermal energy is still the majority load for the business at 57%, renewable energy sourcing is now up to 29%. This should make it popular with ESG investors going forward.

In terms of financials, it has a policy of growing the dividend per share by 10% per annum. Given the current share price, this means the dividend yield sits at 7.28%. This is well above the FTSE 250 average, making it a top dividend share in my opinion.

Looking forward, I think the dividends should continue to grow due to profits heading higher. The raw 2021 figures are distorted by the acquisition of Western Generation in early 2021. However, adjusted revenue was still up 38% year-on-year. This allowed adjusted EBITDA to also jump by 17%.

I do think that there’s a risk due to the skyrocketing natural gas prices. Contour actually provides some energy to the wholesale market, so the concern is that some large corporate clients might default on their obligations due to the high prices.

An alternative banking option

Another option for reliable dividend income, in my opinion, is Close Brothers (LSE:CBG). The merchant bank doesn’t garner the same amount of attention as other UK-focused banks such as Lloyds Banking Group. However, it has a well-established reputation and offers a generous dividend yield of 5.47% at the moment. So when I compare it to the likes of Lloyds with a yield of 4.34%, I can see the appeal.

I think it’s a share to buy now due to the benefit that banks should enjoy in the coming year from higher interest rates. Rising rates allow the business to increase the margin made between charging for liabilities and paying out on assets.

Close Brothers only operates in certain areas of banking, but two of the main ones are deposit taking and provision of lending. Therefore, it should stand in a good position to perform well this year.

However, it does also operate in wealth management. This is becoming an increasingly competitive space, with other larger banks making this area a priority. Therefore, the risk is that Close Brothers loses market share in this area, which could also hinder deposit levels if the money gets moved elsewhere.

Overall, I think both dividend payers are worthy shares to buy now and I’m thinking of doing just that.

There are three companies that really stand out to me as being undervalued growth stocks right now. I would add all of them to my portfolio. 

FTSE 250 shares to buy

The first company on my list is the food group Premier Foods (LSE: PFD). At the time of writing, the stock is trading at a forward price-to-earnings (P/E) multiple of 8.3. However, analysts think the business will report earnings growth of around 17% in 2022. On that basis, I think the stock is undervalued. 

Some challenges it could face going forward include higher ingredients costs. These could put pressure on the company’s profit margins and slow growth.

Still, after around a decade of restructuring its balance sheet, cutting costs and expanding into new markets, I think the establishment has tremendous potential over the following 10 years as it embarks on its next stage of growth.

Management is investing heavily in marketing and infrastructure to help expand its footprint and reach new consumers. This is not reflected in the company’s current valuation. 

Growing in a niche

Financial services group Close Brothers (LSE: CBG) provides lending and wealth management services to a select group of customers.

It has a strong reputation with its clients, which has helped it grow steadily over the past five years. Revenues have increased at a compound annual rate of 7% per annum since 2016. Going forward, the company is looking to capitalise on this. It should also benefit from rising interest rates.

That said, the business is exposed to the UK economic environment. Therefore, if the economy slows substantially, revenues may come under pressure. 

Despite this risk, I think the stock looks undervalued compared to the group’s potential and niche operating model. The shares are selling a forward P/E of 8.7 and offer a dividend yield of 5.8%. Once again, I think this valuation undervalues the company’s competitive strengths and growth potential. 

Trading growth

Financial services group Plus500 (LSE: PLUS) specialises in offering trading services to retail clients. It should benefit from the current stock market volatility as it takes a tiny slice of each trade.

Despite its competitive advantages and position in the market, shares in the company are selling at a forward P/E of just 8.1. I think this significantly undervalues the FTSE 250 retail trading giant.

The stock also offers a dividend yield of 4.9% and management has been returning cash to investors by repurchasing shares over the past couple of years. 

Some of the main challenges the company may encounter going forward include regulatory risks and competition. The market is highly competitive, and complying with regulatory requirements can be expensive. 

Even after considering these challenges, I think the stock looks incredibly undervalued.