Stock market correction: I’d start hunting falling income stocks to lock in big yields

Income stocks are a core part of my portfolio. These stocks provide regular, though not guaranteed, income in the form of dividends.

So why do I think now is a good time to buy another income stock?

Correction? What is the correction?

Some people may ask what is the correction? At FTSE 100 actually up marginally over the past 12 months. But the fact is that the index has been dragged up by surging resource stocks while many indices are down.

For example, shell, the largest stock in the index by market value, is up 40% over 12 months. The index has a disproportionate number of resource-focused stocks.

At FTSE 250 down 20%, and this further reflects the health of UK stocks. Sectors such as retail, housing, banking and travel are still selling at a discount.

This is especially true for UK-focused stocks, as many parts of the global economy are doing better than here.

Dividend yield

Dividend yield is a financial ratio that shows the percentage of a company’s stock price that is paid out each year. And when the stock price falls, the dividend yield rises – assuming dividend payments remain constant. Naturally, other methods are also used.

So by investing when stock prices fall, I can lock in higher dividend yields for the long term.

It’s also important to remember that stock market corrections don’t happen all the time, although the past few years have been an exception.

Personally, after the shock of the pandemic and the Russian invasion of Ukraine – and the associated economic collapse – I’m buying now because I know there won’t be another opportunity like this for a while.

Produce sustainable

With share prices falling across many sectors, we’ve seen some very big returns this year. But some are not sustainable.

For example, persimmon‘s yield reached 20% in the autumn as the share price halved. However, even in 2021, the company’s dividend coverage ratio shows that it will only have enough income to pay its shareholders. So when the operating environment worsened this fall, Persimmon cut its dividend.

The dividend coverage ratio (DCR) is a useful tool for assessing the sustainability of returns. A DCR above two is healthy, nothing around one thing.

For me, some of the best and most sustainable results are seen in the financial services sector today. I recently bought shares in it The Phoenix Group and Direct Line Group.

The company pays a 7.88% dividend per share last year and an annual dividend yield of 7.88%. The insurer said in its autumn update that it expects to generate around £1.2bn from additional, long-term cash generation of new organic business by 2022.

The latter offers a large 10% yield, and after a challenging start to 2022, is now back to writing within the target margin.