Dividend stocks: why I’m buying now for supercharged and long-lasting passive income!

Dividend stocks are a core part of my portfolio. They provide me with a regular source of income, although not guaranteed, and hopefully some upward movement in the share price.

But timing when I buy dividend stocks can make a big difference. And, for me, now is a good time to buy. Let’s take a closer look at why!

Falling dividend stocks

UK stock performance in 2022 was mixed. While resource stocks are rising, other parts of the market are experiencing a developing recessionary environment.

So, of course, I’m looking at a market segment that is collapsing. And that’s because when stock prices fall, dividend yields rise — assuming dividend payouts remain constant.

Also, when the stock price goes up, the dividend yield goes down – assuming dividend payouts remain constant.

So unless the dividend is at risk, it might pay me to buy now.

Sustainable dividends

When the share price falls and the dividend yield becomes too large, it can be a sign that they are not sustainable.

For example, persimmon‘s yield reached 20% as the stock price collapsed at the end of 2022. That’s huge, and it looks like a warning sign.

One way to assess yield sustainability is the dividend coverage ratio (DCR). It measures how many times a company can pay its current level of dividends to its shareholders.

In 2021, Persimmon’s coverage ratio shows that it will have just enough income to pay its shareholders. In this case, the DCR is just above one. A DCR around or above two would be considered healthy.

So, as the operating environment became less favorable, Persimmon reduced its dividend.

Where should I invest?

Persimmon is one of today’s struggling home builders. In fact, some stocks in the sector have seen their share prices drop by 50% over the past year.

Housebuilders are probably an extreme example. Circumstances have worked against them so badly that their margins are under great pressure.

However, I keep an eye on housebuilders as I look at other sectors facing challenges.

Financial services is one such area. I recently added it Direct Line Group into the portfolio and in the past few weeks, the share price has risen by 15%. But I will still buy more.

The company now offers a 10% return, down from nearly 12% when I bought it. And the company, which has been caught by inflation, is now back to writing within the target margin.

Obviously, there are still headwinds in the current economic climate, but insurance has defensive qualities.

It’s also worth noting that Direct Line is down 20% over the year, 31% over two years, and 41% over five years. And looking forward, I see insurance as a solid part of the market. After all, it is necessary in many cases.

So, now could be the optimal time to buy this stock.