Interested in a second income stream? These 2 stocks could help you to build one

These two shares appear to have impressive income outlooks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying into stocks with above-average dividend yields could be a shrewd move. Not only could they help protect you against higher inflation, they may also offer some defence if stock market volatility continues. As such, their total returns could be relatively impressive.

Of course, with the FTSE 100 trading at well over 7,000 points, there may be a limited choice on offer for investors seeking good value income shares. Margins of safety may be less enticing than they once were, but with a potent mix of dividend growth and high yields, these two shares could be worthy of a closer look right now.

Turnaround prospects

Reporting on Tuesday was power station operator Drax (LSE: DRX). The company’s performance in 2017 showed a marked improvement versus the prior year, with EBITDA (earnings before interest, tax, depreciation and amortisation) rising by 64% to £229m. All parts of the business delivered growth, which is encouraging for its future potential.

The company continues to deliver on its strategy and remains on target to reach more than £425m in EBITDA by 2025. Its energy supply growth has accelerated due to the acquisition of Opus Energy. It has also increased biomass self-supply through acquisitions and the commissioning of a third biomass pellet plant.

With the UK undergoing an energy revolution, the prospects for Drax appear to be bright. It looks set to deliver significant amounts of profitability in the coming years which could be used to pay its investors a higher dividend. And with the company yielding 5.7% in the current year, it looks set to offer a significant income stream for its shareholders.

Bargain valuation

Also offering the prospect of impressive dividend performance is water company United Utilities (LSE: UU). The company’s shares have been relatively unpopular among investors in recent months. Political risk remains high, while regulatory concerns have also contributed to a 30% fall in the stock’s price in the last year.

The fall in valuation means it now has a dividend yield of over 6%. This is historically exceptionally high and suggests that there’s a wide margin of safety on offer. Furthermore, with dividend growth set to remain ahead of inflation over the medium term, the stock could prove to be valuable for investors who are concerned about the potential impact of higher inflation on their income.

With United Utilities having an uncertain future, now could be a worthwhile buying opportunity for long term investors. Certainly there are risks associated with the stock and its share price performance could suffer yet further if investors remain focused on cyclicals rather than defensive stocks. But with such a high dividend yield, these risks appear to have been factored in by investors. As such, its risk/reward ratio appears to be highly favourable at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares in United Utilities. 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »