My guess is the threat of a long period of general economic weakness and volatile markets will make UK income shares popular. And it wouldn’t surprise me to see steady, dividend-paying shares among some of the best performers in the next bull run.
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A high yield is not enough
But investing for income can be a good idea whatever the stock market is doing. And that’s why a portion of my portfolio is dedicated to this strategy. But that doesn’t mean I’d target any old stock just because it’s displaying a high dividend yield. Some businesses can have trouble sustaining dividend payments. And that’s often true if they operate in cyclical sectors, such as banking, commodities, house builders, retailers, travel and others.
So, for my dividend-focused strategy, I’m seeking stable businesses with defensive operations. And, to me, that means they tend to have operations less affected by the ups and downs of the general economy.
Defensive sectors include utilities, consumer staples, healthcare and others. And, right now, I reckon there are some attractive companies on my watchlist. For example, I’m keen on the fast-moving consumer goods giant Unilever.
Impressive dividend growth
The compound annual growth rate of the dividend is running at just over 6%. And the payments are backed up by a long multi-year record of solid cash flow. Unilever’s popular brands have kept the business growing for many years. And I expect that to continue. However, positive outcomes are not certain and all shares come with risks.
I also like the way National Grid is aiming to focus its operations on electricity infrastructure. In today’s world that strikes me as a promising move. But such utility businesses tend to face regulatory scrutiny and they often carry a lot of debt. It’s possible for National Grid to find it difficult to maintain dividend payments in the future.
Nevertheless, the company has a good record of operating cash flow and has managed to maintain its shareholder dividends for years. I’d assume the situation will continue. My aim would be to hold the stock for the long term.
And I can’t ignore the rising dividend stream available from smoking products maker British American Tobacco. The company is engaged in a programme of buying back its own shares. Meanwhile, the shareholder dividend has a compound annual growth rate running near 5%.
Other income stocks on my watchlist include pharmaceutical company GSK, trading platform provider IG, and investment company Foresight Solar Fund.
There’s a chance that further general weakness in the stock market could drag down the share prices of these companies. And valuations may improve further. Although even then a positive investment outcome is not guaranteed.
Nevertheless, if we do see further weakness, I’ll be doubling down on my research efforts with a view to adding these income shares to my diversified long-term portfolio.