Income stocks form an important part of my portfolio. They provide me with passive income while requiring very little effort.
I’m buying these three income stocks now because the market is changing. Over the past couple of months, stocks have pushed upwards as earnings frequently beat expectations.
However, stocks have been fairly constant over the past week, with investors keen to see whether the recent optimism has been well placed. Federal Reserve chairman Jay Powell’s speech from Jackson Hole on Friday will be keenly watched globally.
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But with negative UK economic forecasts in mind, I’m looking at banks, defensives and multinationals.
Diageo
In July, drinks maker Diageo (LSE:DGE) said that net sales rose 21.4% to £15.5bn in its full-year report, with double-digit growth across all regions.
The UK-based firm said the good performance reflects the continued recovery of the on-trade business, resilient consumer demand in the off-trade and market share gains.
Diageo only makes a small proportion of its income from the UK. So the weakening pound should be good for business. In January, Diageo contended a strong pound had negatively impacted earnings. But now, with the pound at $1.18, it’s going the opposite way.
That’s why I’ll buy Diageo, although I appreciate that drawn-out recessions won’t be positive for any type of goods consumption. The dividend isn’t massively attractive, at 2%, but I still see Diageo as a good buy right now.
Unilever
Unilever (LSE:ULVR) is an international company (selling in 190 countries), with impressive defensive qualities. The London-headquartered firm owns brands Dove, Vaseline, and Magnum ice cream.
The fast-moving consumer goods business has already demonstrated its defensive qualities. In its first-half results, Unilever said it lifted its prices by 9.8% compared to the same period of 2021, but only saw a 1.6% contraction in sales volume. As a result, profits were up during the first half as sales revenue grew 8.1%.
I appreciate that a prolonged recession in the UK won’t be good for consumption patterns, but I think Unilever’s international reach will see its GBP revenue inflated.
I’ve already bought Unilever but would buy more today.
Lloyds
Lloyds (LSE:LLOY) is one of my favourites right now. I think banks are poised to enter a new era of record profit-making as interest rates rise to levels not seen in decades.
I see this bank as a lower risk investment. It doesn’t have a big investment arm — which have been a drag on some banks this year — and its primary market is UK mortgages. In fact, these represent more than half of the bank’s loans.
Lloyds is already receiving more money in the form of loan repayments and net interest margins are rising. Larger profits should allow the business to expand in ways it hasn’t done since the financial crash.
A recession won’t be good for credit quality, but I’m confident that higher interest rates will more than make up for it.
I already own Lloyds shares but would also buy more today.
