National Grid plc isn’t the only defensive dividend stock I’d buy today

This small-cap deserves a place alongside FTSE 100 giant National Grid plc (LON:NG) in any income-focused portfolio.

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While no investment is without risk, power provider National Grid (LSE: NG) comes close thanks to its virtual monopoly on the market it operates in. It’s also a particularly good company to hold if you think that the ongoing political uncertainty surrounding Brexit (not to mention growing tensions between North Korea and, well, everyone else) could lead to share prices losing the fizz they’ve generally shown since last July. With inflation also outpacing wage growth, it’s likely that we’ll see a weakening of sentiment towards consumer-focused stocks as we move closer to our targeted EU departure date of March 2019. That capital will need to go somewhere and where better than into a company whose operations are so vital to our everyday lives?

Trading at 16 times forecast earnings for the current year, National Grid will never excite, but surely that’s the complete opposite of what those depending on income from their investments are looking for. The shares currently offer a corking forecast 4.9% yield, covered 1.3 times by profits. That’s some reward, even if the stock has lost some of the recent momentum that led its price to almost breach the £11 mark back in May.

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Joining the list

Of course, no rational investor would pin all their hopes on just one company. For this reason, I’d be highly likely to add pawnbroker, gold purchaser and personal loans provider H&T (LSE: HAT) to a list of companies I’d buy if I was looking to generate reliable income from my portfolio.

In its recent interim results, the Sutton-based company reflected on a “strong start” to the year. Pre-tax profits in the six months to the end of June were up a very encouraging 62% (to £6m) thanks in part to a rise in the price of gold as a result of sterling’s recent weakness. Competitive pricing and a growing awareness of the company among the general public saw the £123m cap’s loan book rise just over 87% to £11.8m. 

Elsewhere, H&T claimed that the launch of a personal loan product with APRs of less than 50% would make it more attractive to those wanting access to loans over the longer term. Recent investment in its pre-owned watch and jewellery website (est1897.co.uk) should also, it believes, help to increase its share of this market. 

Like National Grid, I think shares in H&T would be a fairly safe bet in the event of a market downturn. While a proportion of its fortunes will always depend on the price of gold, history shows that pawnbrokers have generally done rather well during troubled times. 

Despite recent solid performance, the 120-year-old firm’s shares still trade on a fairly reasonable valuation of 15 times earnings for 2017. What’s more, a low price-to-earnings growth (PEG) ratio of just 0.83 suggests investors are getting access to lots of growth for their money.  

Yielding a forecast 3.1% in the current year, H&T’s payouts may be quite a bit less than those of National Grid, but dividend cover is a lot higher at 2.2 time profits. The recent 10% hike in the interim dividend — from 3.9p to 4.3p per share — is encouraging and analysts are already predicting a 13% rise in the full dividend in 2018.

While the company is very much a minnow compared to the £33bn cap, I think the rewards from investing in H&T could be just as good.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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