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2 great ‘safety first’ income stocks for your portfolio

Photo: Paolo Neo. Public Domain.

Every portfolio needs a bit of balance, with a blend of riskier and safer stocks that give you a winning combination of progressive and defensive capabilities. Here, we look at the safe side of that equation, with two solid income-paying stocks for you to consider.

Papa Smurfit

Packaging company Smurfit Kappa Group (LSE: SKG) may have the strangest name on the FTSE 100 but there is nothing odd about its recent performance. This stock is a three-bagger, having risen 305% over the past five years, and is currently enjoying another growth spurt, up 27% in the last three months. This was good enough to propel it onto the FTSE 100 in December 2016, with a current market cap of £5.14bn.

Smurfit Kappa enjoyed a steady 2016, with full-year revenues up 5% on a constant currency basis, while EBITDA of €1.2m set a new record for the group. We are looking at a company with big expansion plans, one that bought three US and one UK company last year, and is hungry for more. It has global ambitions, and has posted an average annual capital spend of more than €450 over the last three years.

Kapp that!

The company looks well set but – isn’t there always a but – City analysts expect Smurfit’s earnings to drop in 2017, from £8.16bn to £7.19bn. That will translate into an 8% drop in earnings per share (EPS), and higher input costs will also hurt. Things should pick up in 2018, with earnings forecast to jump to £7.35bn and EPS rising 7%, but you have to brace yourself for some bumpiness.

However, I don’t expect that to affect the dividend income, which is well covered and highly progressive. Smurfit Kappa pumps out the cash, generating free cash flow of €303m last year, and this allowed it to increase its dividend by an impressive 20% to 5.6 cents per share. It currently yields 3.1%, covered a generous 2.4 times. The income is forecast to hit 3.6% by the end of 2018. It looks a safe, progressive bet to me.

Imperial might

You probably won’t be surprised to see tobacco company Imperial Brands Group (LSE: IMB) named as my other ‘safety first’ stock of choice, given the sector’s well-known defensive capabilities. Share price growth has been solid but not spectacular, with a five-year return of 50%, but zero growth in the past 12 months, trailing rival British American Tobacco which grew 67% and 30% over the same timescales.

However, Imperial Brands looks nicely valued at 15.4 times earnings, and yields a chunky 4%, covered 1.6 times. EPS is forecast to grow 9% this year and 5% next, which should help to keep the momentum going. Yesterday’s trading update confirmed that the company is on track to meet earnings expectations for the half year at both constant currency and reported exchange rates. It expects a currency translation benefit on net revenue and profit of about 13%-14%, thanks to weaker sterling.

Income-seeker’s friend

A £300m first-half investment splurge will hit revenues and profits, but both should pick up in the second half. Declining volumes are the major threat as smoking goes out of fashion in the developed world. However, people have been saying that for 50 years,  and tobacco stocks nevertheless remain among the most rewarding of the market. Crucially, they are also among the safest, and income-friendly.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.