Dividend stocks providing passive income form a large part of my portfolio. These stocks provide a useful revenue stream that involves minimal input from me. Personally, I reinvest most of my dividends to benefit from compound interest, but for others, it can complement their hard-earned salaries.
Currently, with inflation hitting highs not seen in decades, I’m on the lookout for stocks offering attractive and sustainable dividends. So, here are my top five picks right now.
Lloyds
Lloyds doesn’t offer the biggest dividends on the FTSE 100, but it’s sustainable. And with interest rates rising, the bank could become more profitable. Higher rates mean higher margins. However, the bank isn’t overly diversified. Mortgage make up 71% of its loans. I’m upbeat on the property market in the long run, but there could be some short-term pain.
Passive income stocks: our picks
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M&G
M&G is a UK investment manager offering a very attractive 8.4% dividend yield. Pre-tax profits took a substantial hit in 2021, with losses resulting from short-term fluctuations hitting investment returns and higher restructuring costs.
However, assets under management stayed flat at £370bn. HSBC is certainly upbeat on M&G’s long-term prospects, having recently upgraded it to ‘buy’.
Synthomer
Synthomer‘s share price has fallen to to pre-pandemic levels but demand for its acrylic and vinyl emulsions polymers (latex gloves) remains strong. It’s offering a 9.6% dividend yield and trades with a price-to-earnings ratio of just four. Dividend coverage was 2.5 last year.
The company has just taken on a new business unit from the US and a new CEO. There may be some pain while the company adjusts.
Vistry Group
At today’s price, Vistry Group is offering a 6.5% dividend yield. There coverage ratio was a healthy 2.1 last year.
The stock is one of the best performing housebuilders, having exceeded pre-pandemic earnings in 2021. Vistry posted adjusted pre-tax profits of £346m last year.
The firm recently said that adjusted pre-tax profits will likely come in at the top end of analysts forecasts, between £396.3m and £415m.
Steppe Cement
At today’s price, Steppe Cement has a 9.2% dividend yield and a dividend coverage ratio around 1.8. This is certainly a more niche investment proposition than the others on this list. But Steppe forecasts to do well on the back on long-term trends in the Kazakh housing market. The Kazakh government says demand will remain strong owing to an increasing birth rate and more marriages.
One issue with this stock is the difference between the buying and selling price. I’d need to see the share price rise by around 5% to get my money back, although the dividend would help with that.
Legal & General
Legal & General offers a 7.1% dividend yield at today’s price. Demand for insurance is likely to remain strong, so I see this stock as a good long-term investment. However, it trades at just 7.5 times earnings.
The stock, like many other FTSE 100 heavyweights, has underperformed in recent years. In fact, it’s only up 0.25% in five years.
Despite this, pre-tax profits jumped to £2.9bn last year, way ahead of pre-pandemic levels. Moreover, Legal & General only lifted its dividend in March, so it’s unlikely to be cut in the immediate future.
