FTSE correction: a once-in-a-decade chance to build a high-yielding portfolio?

At FTSE not reward investors in 2022, unless those investors have resource-focused portfolios. The reality is that many stocks are down, hard.

But corrections also create opportunities, and that’s what I’m talking about now. Specifically, those related to dividends.

Disaster or opportunity?

At FTSE 100 up slightly over the past 12 months, but that’s largely because the index has been boosted by rising resource stocks – the oil and energy giants. shell it is a huge increase of 39% over the year.

However, the FTSE 250 better reflect the health of the UK economy and the performance of the wider market. The index is down 20% in 12 months.

Meanwhile, stocks in the housing sector are down about 40% over 12 months, on average. Giant house persimmon has 55% wiped off its share price.

The problem is, these corrections don’t happen often. With very high inflation and a recessionary environment, the situation is looking very bad right now. But I believe the macroeconomic environment and the market will improve throughout the 20s.

Rising yield

So I see a market segment that is collapsing. I don’t tend to buy stocks that are in a bull market, so I’m staying away from energy companies right now.

Instead, I look at stocks in banking, financial services, healthcare and retail. This is a segment of the market that has suffered over the past year. Housing stocks are also suffering, but I am not looking at this sector at the moment.

But what’s important to note is that when stock prices fall, dividend yields rise — assuming dividend payouts remain constant. And, naturally, it works the other way around too. This is one reason why I tend to stay away from rising stocks.

Buy low and sell high is the goal. But buying low dividend stocks also gives you the advantage of ‘locking in’ higher dividend yields.

After all, the dividend yield I receive also reflects the price I paid for the stock, not the subsequent stock price.

So buying now offers a unique opportunity to ‘lock in’ higher returns for your portfolio before the market recovers.

Produce sustainable

When dividend yields get big, it’s usually a warning sign. For example, as Persimmon The share price fell earlier this year, the dividend yield almost reached 20%. That was huge, and proved unsustainable as dividend payments were eventually cut.

But there is evidence that dividend yields are unsustainable even before reaching 20%. Looking at the dividend coverage ratio, we can see that Persimmon only generated enough cash to pay its shareholders last year.

And, with the outlook getting worse in 2022, the coverage ratio will drop below one, meaning the company won’t have enough cash to continue paying.

However, I also need to do some research and look at other foundations. I want to buy undervalued stocks, not just cheap ones.

And it requires me to look at metrics including the price-to-earnings ratio, or the EV-to-EBITDA ratio. For a more complete picture, I would use metrics like the discounted cash flow model.

Collectively, these approaches can help me generate passive income and hopefully index returns.