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My top 2 UK shares to buy for strong dividend returns!

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UK shares have been pushing upwards in recent weeks with the FTSE 100 surpassing the benchmark figure of 7,500. But this doesn’t mean that all stocks have been growing equally. In fact, many stocks are still trading at a considerable discount, while the index as a whole has been pulled upwards by oil and mining businesses.

So, I still consider now to be a good time to invest in non-resource stocks. But with inflation reaching above 10% in July, I’m also looking for stocks offering attractive dividend yields that will negate the impact of inflation on my portfolio.

So, here are two of my top UK shares to buy right now.

Lloyds

Personally, I think it’s hard to look beyond Lloyds (LSE:LLOY) right now. The bank offers an attractive 4.6% dividend yield, which isn’t inflation-beating by any stretch of the imagination. But it’s sustainable and I can see the dividend payment going upwards as Lloyds’ net interest margins increase.

Amid negative economic forecasts, it may actually do rather well. It’s unlikely that we will have a deep recession so I don’t have too many fears for bad debt rapidly increasing. But the nature of inflation is demanding increasingly hawkish action from the Bank of England.

Higher rates make a huge difference to Lloyds’ ability to generate revenue. Incremental movements in the rate bring about sizeable changes in things like mortgage repayments. UK mortgages represented 61% of the bank’s total gross lending at 2021 year-end.

Unless the bank puts more money aside to deal with recession provisions, I anticipate the next quarter being a strong one for it. In fact, in a higher rate environment, I really think its earnings could soar.

Obviously, a deeper than anticipated recession won’t be good for banks, but I don’t see that happening over the next year.

Persimmon

Persimmon (LSE:PSN) currently has a dividend yield around 13%, but I anticipate that halving in the coming months and such a yield is unsustainable. However, despite mounting pressures for the industry, I think now is a good time to buy housebuilder stocks.

This developer is already down 47% over the past 12 months. In fact, Persimmon trades near its pandemic lows.

Yet there are plenty of positives right now. House prices are at all-time highs and there’s some clear resilience in demand, despite rising rates. The firm also recently announced that its forward sales rate was 90% and said it would complete between 14,500 and 15,000 homes this year.

Another positive is that Persimmon says it will only spend around £75m on recladding thousands of homes deemed unsafe. This is around 10% of pre-tax profits from 2021. While this doesn’t sound great, as a proportion of profit compared to other housebuilders, it’s a real positive. Some of its peers will have all of their 2022 profits wiped out by the fire safety pledge.

A sustained recession and higher interest rates may weigh on demand, but in the long run, there’s an acute shortage of housing in the UK. And I see the current dip as a good time to buy shares in this housebuilder.

The post My top 2 UK shares to buy for strong dividend returns! appeared first on The Motley Fool UK.

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James Fox owns shares in Lloyds and Persimmon. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.