UK indexes have fallen over the past two months, particularly after Liz Truss spooked markets with her catastrophic fiscal policy. Both the FTSE 100 and FTSE 250 are down considerably from summer highs. And when share prices fall, dividend yields go up — unless the company reduces dividend payments.

There’s obviously concern that we’re entering a recessionary environment and there will be further negative pressure on stocks. But, for me, these two stocks look well positioned to outperform the market and provide me with passive income.

Vistry Group

I think housebuilder stocks have fallen far enough. Vistry (LSE:VTY) grew impressively in 2021, with revenue coming in at £2.3bn, more than double any year before the pandemic.

And this growth has continued in 2022. Adjusted revenues in the six months to 30 June rose nearly 6% to £1.33bn, while total completions improved 5% to 5,409. Adjusted operating profits were ahead 13% at £198.2m.

However, with the economic climate worsening, and interest rates being hiked, the share price has tanked. In fact, Vistry is down 50% over one year. That’s huge, but in line with other housebuilders.

The issue is that analysts contend house prices will remain flat while cost inflation will run at 5%. That’s clearly an issue and it’s likely to impact housebuilders right through 2023.

But in the long run, I’m confident demand will return. And after a bumper two years, housebuilders should have the resources to see these troubled times through. Vistry has a debt to total capital ratio of 12.5% — a lower figure than the previous year’s 14.6% — and a net profit margin of 9%.

The stock, which is also the target for a proposed merger with Countryside Partnerships, also offers an attractive 10% yield. With 2022 still expected to be a record year, I anticipate the yield to remain constant for the time being. I already own Vistry shares, but I’m buying more.

Direct Line

Direct Line (LSE:DLG) posted a 31.8% decline in first-half pre-tax profit in H1 as it took a hit from claims inflation. Pre-tax profit fell to £178.1m from £261.3m in the first half a year earlier, although this was ahead of consensus expectations of £155m.

As a result of the above, the insurer is now down 31% over the year. However, I see this dip as an opportunity to add this stock to my portfolio. Regardless of a possible recession, people will still need or want to insure their homes and vehicles.

And this is something the business has highlighted. The group contends that its fundamentals remain strong and that through steps taken within its garage network, as well as pushing up prices, Direct Line has returned to writing at target margins “based on latest claims assumptions“.

I’m buying Direct Line because of these defensive qualities, but also its sizeable 11% yield. Even if payments are cut, proportional to the decline in H1 profits, it will still remain above the index average.

I’m considering building my exposure by investing in Vistry Group (LSE: VTY). I’m attracted by its low forward P/E ratio of 4.2 times and its 11.7% corresponding dividend yield.

Vistry’s share price has collapsed during 2022. The threat of rocketing interest rates has hung over the housebuilders for the past year. The danger has increased following the market mayhem that accompanied September’s mini-budget too.

Signs are growing that homebuyer demand is cooling as a result. And this threatens to get worse as mortgage providers pull products (and especially those that require only small deposits).

Latest data from the Royal Institution of Chartered Surveyors showed new-buyer enquiries fell for a fifth straight month in October. Chillingly, the body commented that “price expectations are now slightly negative” for the next 12 months.

Bad news

As an investor in Britain’s housebuilders, all of this news is pretty worrying. But I haven’t been tempted to sell my holdings yet. This is because I buy shares with a view to holding them for the long haul, say a decade or more.

I do need to consider however, how the deteriorating trading environment will hit housebuilder dividends in the near term. Their above-average yields are the chief reason I bought Persimmon and those other FTSE 100 shares to begin with.

As a potential investor, I’m pretty confident that Vistry will continue paying above-average dividends, even as profit risks rise. City analysts think the FTSE 250 company will pay a full-year dividend of 69.6p per share in 2022. This is covered twice over by anticipated earnings, giving a decent margin of safety in case profits forecasts disappoint.

Yet even if the full-year dividend falls short of estimates it’s likely to still be much better than most other UK shares. Vistry’s 11.7% forward yield is, after all, well above the 3.3% FTSE 250 average.

Good news

The outlook for Vistry and its peers is more perilous than it was a year ago. Yet there are also reasons for me, as an investor, to be bullish.

Weak housebuilding rates have created a huge supply shortage in Britain. This should at least stop property prices falling off a cliff. At the same time, government schemes like the low-deposit, Deposit Unlock, and recent Stamp Duty changes will support demand from new buyers.

Major lender Barclays certainly remains upbeat about the housing market. Last week, it said that “higher interest rates are expected to adversely impact the housing markets in major economies”. However, it added that “house price growth remains positive over the forecast horizon [to 2026]”.

The verdict

I think the outlook for Vistry remains ultra-bright. And its planned merger with Countryside Properties could supercharge its profitmaking ability in the years ahead.

That said, I’ll wait until the medium-term outlook for housebuyer demand becomes clearer before buying the builder. I will add it to my shopping list with a view to snapping it up later on.

This approach can act as a great form of diversification within a portfolio. This is because a steady stream of additional income can help to offset any short-term share price falls. Furthermore, if you can find the right opportunity, this can become a fairly passive approach to investing.

For this reason, I look for companies within the FTSE that are paying significant dividends and have high-quality fundamentals to accompany them. Here’s one I found.

A tough few years

Vistry Group (LSE: VTY) is a UK-based residential construction company. It operates through two main business segments — housebuilding and partnerships. All of its operations are focused within England.

It would be fair to say that the company has not had the best few years. The share price is down 52.7% in 2022. Furthermore, the price has fallen almost 62% from pre-pandemic levels. Despite this, the dividend characteristics of the company are very appealing, with a current yield of 10.7%.

Impressive dividend

Vistry’s yield is also forecast to hit 13% next year. This is considerably above the FTSE 100 average of 3.8%. Vistry has paid this dividend consistently for 12 years, and the yield has grown over both of the last two years. Despite this significant yield, the company is still able to pay that level comfortably, with a dividend cover ratio of 2.1

I also find the Vistry’s underlying fundamentals attractive, with low levels of debt and strong cash generation. The company has achieved a reasonable level of earnings generation on invested capital, which is a core indicator of a share’s quality.

Vistry has grown turnover consistently over the last five years, and despite a tough 2020, underlying earnings have now exceeded pre-pandemic levels. I believe these are both good signs, as a high dividend needs to be accompanied by strong company performance.

Challenging headwinds

However, it is important for me to remember that the sizeable fall in share price over the last two years has boosted the yield. This means that if the share recovers, the yield is likely to fall back to the levels seen pre-pandemic of 2.1%. Furthermore, the housing sector is exposed to several headwinds, such as interest rate rises and the cost-of-living struggles.

Nonetheless, I believe that this current yield presents a great opportunity. The ability to add a company with an elevated yield, and strong underlying fundamentals, is very appealing. Therefore I would add this dividend share to my portfolio over the coming month, once I put together the necessary funds.

If I had some cash to invest, here are two I’d buy today.

Legal & General Group

When looking for big dividend players, I can’t ignore Legal & General (LSE: LGEN) shares. A 26% fall in the L&G share price over two months has pushed the forward dividend yield up to a whopping 8.81%.

First, let’s examine the risks facing the FTSE 100 financial services outfit. Pensions are a big part of its business. Unsurprisingly, the stock tumbled in the market panic prompted by the mini-budget on 23 September, given its exposure to rising gilt yields.

In the short term, an emergency £65bn bond-buying operation conducted by the Bank of England has calmed nerves. L&G was quick to reassure shareholders in an unscheduled trading statement last week, confirming it was not a forced seller of UK government bonds in the turmoil.

However, the central bank’s intervention ended on Friday. Further turbulence in the bonds market is a downside risk to L&G shares, particularly if financial stability concerns regarding pension funds worsen. Nonetheless, for me, the finances look healthy enough to allow the company to ride any volatility.

Our balance sheet and liquidity position remain strong, and our businesses are highly cash generative.

Sir Nigel Wilson, Legal & General Group CEO

L&G delivered an 8% increase in operating profit to £1.16bn for H1 2022. The firm also announced cumulative capital generation of £4.1bn. This means it’s currently on track to achieve its ambition of £8bn-£9bn by 2024.

With the group hiking its interim dividend 5% to 5.44p per share, I think now could be an excellent time for me to invest at a bargain price. The present economic climate is unpredictable, but I believe there’s a good chance L&G shares could rally if traders regain confidence in the UK’s fiscal direction. Right now, I don’t have spare capital to deploy, but if I did, I’d buy.

Vistry Group

FTSE 250 housebuilder Vistry Group (LSE: VTY) has also seen its share price plummet this year. The stock’s down 56%, causing the forward dividend yield to rocket to 12.13%.

The company faces significant headwinds. Rising mortgage rates and the growing likelihood of a housing market slump have harmed the Vistry share price. This pressure could intensify if the macroeconomic environment fails to improve.

However, the business is taking steps to bolster its position despite adverse market conditions. It recently announced a £1.2bn merger deal with rival Countryside Properties, which is expected to complete on 11 November. The new company will become the UK’s third-largest housebuilder.

Vistry expects the deal could lead to £50m in annual cost savings two years after completion. What’s more, the housebuilder anticipates adjusted pre-tax profit for 2022 will be around £417m and that this figure could potentially double to more than £800m post-merger.

Additionally, the company’s CEO and CFO recently snapped up £248,000 in stock. This suggests they see room for growth at current share price levels. Encouraged by insider buying and an exciting merger, if I had spare cash to invest, I’d suppress my concerns about a possible property price crash and open a small position today.

Rio Tinto

Rio Tinto’s (LSE: RIO) share price has slumped as commodities prices have come under pressure. This particular FTSE 100 stock produces a wide range of raw materials including copper, aluminium and lithium. But it generates around 75% of group earnings from iron ore.

This creates significant danger as worsening demand and supply dynamics for the steelmaking ingredient depress prices. Iron ore shipments from Brazil, for example, jumped 8.7% year on year in September to two-year highs. Meanwhile, demand for the material is slipping as Asian steel mills curtail production.

Prices of Rio Tinto’s key commodities are in danger of severe cooling moving into 2023. But from a long-term perspective, I believe Rio Tinto’s profits outlook remains super attractive.

The company’s wide range of commodities give it exposure to several white-hot growth sectors. This in turn could power profits — and consequently shareholder returns — through the roof.

Copper and lithium demand should soar over the next decade as electric vehicle build rates pick up. Borates sales could rocket as sectors like consumer electronics, agriculture and construction grow. And its iron ore operations should benefit from urban-related construction in developing markets.

Rio Tinto’s share price is actually up fractionally from levels at the start of 2022. But I think it’s descent since the spring represents an attractive dip-buying opportunity.

It’s why I bought the company for my Stocks & Shares ISA in June. And at current prices of £50 per share, I’m thinking of buying more.

Rio Tinto trades on a forward P/E ratio of 6 times. It also boasts an 10.3% dividend yield for 2022.

Vistry Group

Levels of uncertainty around the housing market have spiked in the past fortnight. Share prices across the homebuilding sector have stabilised following an initial slump, but businesses like Vistry Group (LSE: VTY) are in danger of fresh plunges.

Mortgage rates are soaring in the aftermath of late September’s ‘mini budget.’ This is putting extra pressure on homebuyers’ budgets and threatening to derail property sales.

Rates on two-year and five-year fixed mortgages have soared to 12- and 14-year highs respectively above 6%. They’re predicted to keep rising too as the Bank of England acts against runaway inflation.

I own several housebuilding stocks. In fact, I bought Persimmon shares over the summer. And it’s clear to me that the risks facing these businesses has risen considerably of late.

But, at current prices, UK shares like Vistry look ultra-tempting. The FTSE 250 business trades on a P/E ratio of just 4.1 times and boasts a 12.5% dividend yield.

I might hold off buying Vistry shares right now until the near-term trading picture becomes clearer. Credit Suisse has advised that house prices could fall as much as 15%. But I believe the long-term outlook here remains solid, given Britain’s severe homes shortage and disjointed housebuilding policy.

Worries over the UK as an investment destination might be growing. But I feel the rapid sale of many stocks is driven by emotion rather than sound investing strategy. This leaves an opportunity for level-headed investors to nip in and grab a bargain.

Here are two FTSE 250 stocks I think are brilliant buys after falling today.

10.2% dividend yield!

Housebuilders like Vistry Group (LSE: VTY) are sinking as markets ponder the prospect of emergency action by the Bank of England. Some economists believe an interest rate hike of 1% later this week is imminent to shore up the plummeting pound.

The risks to Vistry et al might be rising. However, I believe the threat from a rising interest rate is now priced in. This FTSE 250 index stock now trades on a mega-low price-to-earnings (P/E) ratio of 4.8 times for 2022. Its dividend yield meanwhile has leapt to an enormous 10.5%.

Poor housebuilding activity in recent decades has created a huge shortage of available homes. And this means that, even as interest rates rise, property prices also keep on rising. Rightmove said today that average asking prices rose 8.7% in September annually, up from 8.2% in August.

It’s my opinion that the Stamp Duty cuts announced last week by Kwasi Kwarteng could also boost home sales, even as interest rates rise. Tim Bannister, director of property science at Rightmove, has even said that “Friday’s announcement is likely to stimulate some more demand” in the housing market.

A top renewable energy stock

Spreading risk aversion on the London Stock Exchange has even pulled defensive stocks like Greencoat UK Wind (LSE: UKW) lower.

This FTSE 250 share has been trading on rock-bottom P/E ratios in spite of recent price gains. And today’s decline has pushed its earnings multiple to a mere 3.1 times. With its dividend yield also rising to 4.9%, I think Greencoat’s a top value stock to buy.

Even as the UK economy toils, Greencoat — which is invested in 45 wind farms across the country — can expect revenues from its electricity-generating assets to remain stable. I believe the business is actually a solid long-term buy as demand for low-carbon energy goes from strength to strength.

The cost of keeping wind turbines in working order is high. The future costs to Greencoat could rise sharply as extreme weather events become more common too. But all things considered I think the rewards of owning the share outweigh the risks. And especially so at the current share price.

Here, I’m going to highlight some interesting director dealing I’ve spotted recently. Should I follow these insiders into these stocks?

£99k buy from the CFO

Let’s start with asset manager abrdn (LSE: ABDN). Here, CFO Stephanie Bruce bought 66,709 shares at an average price of 148p on 5 September. This purchase cost the insider around £99,000.

I think it’s significant that abrdn’s CFO has bought stock. Finance chiefs are top-level insiders and they generally have an excellent understanding of their companies’ operating activities and financials. I also think it’s interesting that Bruce has invested nearly £100k in stock. This suggests she’s quite confident Abrdn’s share price is set to rise.

However, it’s worth pointing out that she also made large purchases in March and December when the stock was trading at much higher levels. So her track record, in terms of timing, isn’t great.

Would I buy abrdn shares today? The answer to that is no. The stock does offer a high yield. However, I have a few concerns in relation to the company’s competitive advantage.

It’s worth noting that analysts at Deutsche Bank just downgraded the stock from ‘hold’ to ‘sell’.

Purchases from the CEO and CFO

Next up is housebuilder Vistry (LSE: VTY). Here, both CEO Greg Fitzgerald and CFO Earl Sibley bought stock on 8 September when it was trading at 804p. Combined, the two insiders spent around £248,000 on stock.

So now we have two top-level directors buying stock. That’s notable, to my mind. The more insiders buying, the more powerful the trading signal.

Vistry shares do look cheap at present. Currently, they trade at just five times this year’s earnings forecast. So there could be some value on offer here right now.

Having said that, I see this stock as quite risky, given current economic conditions. In recessions, housebuilders tend to underperform.

Given the risks, I think the safest move for me is to leave this stock alone for now.

£102k buy from a clued-up director

Finally, AIM-listed Alpha FX (LSE: AFX). It saw a £102,000 buy from board member Lisa Gordon on 13 September.

This director dealing activity looks really interesting to me due to the fact that Gordon has an investment background. Earlier in her career, she worked as an equity analyst. Meanwhile, she is also Chair of stockbroker Cenkos Securities. So we can assume she knows what she’s doing here.

Alpha FX continues to grow at a strong rate. Recently, the group posted revenue growth of 35% for the first half of 2022. And founder and CEO Morgan Tillbrook was very optimistic about the future.

“Although much of the world is moving into a challenging macro environment, I have never felt more confident about the potential of the business and our long-term growth prospects,” he said.

Putting this all together, I’d buy Alpha FX shares for my portfolio today. The stock isn’t cheap, so there is some valuation risk. However, all things considered, I see the risk/reward proposition here as attractive.

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.

Housebuilder

The name Vistry Group may not resonate as strongly as other housebuilders due to the fact the business was only formed under this name in 2020. It was created through the acquisition completed by Bovis Homes of Linden Homes. With over 13 regional business units, the firm has approximately 200 sites currently across the UK. It is one of the largest housebuilders in the UK.

So what’s happening with Vistry shares currently? Well, as I write, they’re trading for 792p. At this time last year, the stock was trading for 1,104p, which is a 28% decline over a 12-month period.

A dividend stock with risks

Firstly, the current economic climate could affect Vistry negatively. Soaring inflation, the rising cost of materials, as well as the supply chain crisis, won’t help. For example, rising costs could put pressure on profit margins. Next, supply chain issues could result in building and sales being delayed. All these issues could affect performance and returns.

Next, rising interest rates, to combat inflation, have made it harder for consumers to obtain a mortgage. This could result in a shorter-term decline in demand for properties as many may turn to the rental market instead. The current cost-of-living crisis could add to this too.

The bull case and my verdict

So to the bull case. Firstly, I’m buoyed by Vistry’s position in the market, as well as its profile and presence. In fact, in 2021, it was voted the largest housebuilder in the UK at the Housebuilder Awards. I believe it could leverage this size advantage into increased sales, performance, and eventually returns too.

Next, the housing market in the UK could benefit Vistry, and all other housebuilders, in the longer term. At present, demand for new homes is outstripping supply. This means new homes could be snapped up quickly, which could result in performance growth for Vistry, and dividends for shareholders.

For any dividend stock I want to know the level of return and I measure this by the dividend yield. Currently, this stands at 7.5%. This is significantly higher than the FTSE 250 average of 1.9%. I am conscious that dividends are never guaranteed, however. Furthermore, the shares look decent value for money right now on a price-to-earnings ratio of eight.

Finally, I can see that Vistry has a good track record of performance. I am aware that past performance is no guarantee of the future. However, looking back, I can see it has grown revenue and profit year on year since 2018.

To summarise, I expect Vistry shares to experience some headwinds in the short to medium term. Luckily, I invest for the long term. With that in mind, I believe Vistry could be a good dividend stock to buy for my holdings. Its profile, presence, passive income opportunity, as well as performance track record and current market conditions, help my investment case.

Building

That’s what makes Vistry Group (LSE: VTY) look so attractive to me. The housebuilder, formerly known as Bovis Homes, will release first-half results on 8 September. The Vistry share price has been on a slide, along with the whole sector.

That share price weakness has helped push the forecast dividend yield up close to 10%, and has dropped the price-to-earnings (P/E) multiple on the stock to under six.

A lot will depend on how the property market holds up in the second half. But housebuilders that have reported so far have shown strong first-half business.

House prices in August were up 10% year-on-year, though that will surely slow.

DIY

Kingfisher (LSE: KGF) dividend forecasts suggest a yield of above 5%, which is not the biggest around. But I do like one thing about it. The dividend is growing as the share price falls.

Since slashing the dividend in response to the pandemic, Kingfisher has been rebuilding it. And for the year ended January, at 12.4p per share it already exceeded pre-pandemic levels.

What’s more, the cash was covered almost three times by earnings. Forecasts predict a modest increase over the subsequent two years. But in the current economic climate, I think any dividend rise is good news.

The company, which owns DIY chain B&Q among other retail businesses, is currently returning capital to shareholders through a share buyback programme. To me, that bodes well for its dividend prospects.

Soft things

We’ve seen another dividend recovery at Dunelm Group (LSE: DNLM), following a pandemic suspension. And again, a falling share price has helped strengthen prospective yields.

Dunelm is due to deliver full-year results on 14 September. And the home furnishings retailer has already told us of a 16% rise in sales. Digital sales, at 35% of the total, are down 11 percentage points from the year before.

So we’re seeing a weakening of the pandemic effect. But it’s still interesting to see such a high percentage for products that people traditionally like to touch and feel before buying.

Dunelm lifted its interim dividend by 17%. The same rise in the final dividend would yield 6%.

Dividends

Dividend forecasts are at best a vague indicator of the cash we might get. And I’ve seen analysts doggedly sticking to obviously unrealistic forecasts, long after investors could see they weren’t going to happen.

So I treat them with a good deal of caution. And what I want to see most is signs that a forecast might be realistic, rather than the forecast itself. We’ll know Dunelm’s for sure in September. And for the other two, I’ll be looking for evidence of strong and growing cash flow.