Is a new European crisis brewing? Will Donald Trump’s trade wars spark a global economic collapse? Will Brexit devastate the UK economy? Will the market sell-off continue, or is the worst over? Right now we don’t know the answer to any of these questions.
However, what we do know is that the best way for investors to protect against uncertainty is to focus on finding good, cheap income stocks.
So today I’m looking at two stocks in the FTSE 250 index that I believe have fantastic dividend credentials.
Slow and steady
Power plant owner-operator Drax (LSE: DRX) might not be the most exciting company around, but I believe the group’s business makes it immune to market uncertainty.
To add to its portfolio of power assets, today Drax announced that it is spending £702m to acquire Scottish Power’s portfolio of pumped storage, hydro and gas-fired power generation assets. The portfolio includes the vast Cruachan hydro facility in the Scottish highlands, which should further reduce the group’s exposure to legacy fossil fuel projects.
This isn’t the only low-carbon initiative the company is pursuing. Over the past few years, Drax has become a UK leader in the supply and use of compressed wood pellets for generating power. These are generally considered to be a more environmentally friendly fuel for power generation. The firm is aiming to have converted all of its coal-fired plants to wood pellets by 2025.
As management has pushed through these changes, Drax has struggled to remain profitable, but it looks to me as if the company has now pulled through this challenging period. The City is expecting a net profit of £36m for 2018 rising to £95m for 2019, based on these numbers, the stock is trading at a forward P/E of 15.7. I think this is an appropriate multiple to pay for a business that is as defensive as Drax.
On top of this, analysts have the company yielding 4.5% in 2019. These numbers all lead me to conclude that there is a buying opportunity here.
Alongside Drax, I’m also interested in AG Barr (LSE: BAG). It is one of the few companies left on the market where the founding family still owns a percentage of the business and has a hand in the day-to-day running of the enterprise, which in my opinion makes it the perfect investment for long-term defensive investors.
Research has shown that family firms tend to perform better over the long run because they are not distracted by short-term market changes. These companies invest for the long term, with the desire to achieve the best outcome for the next generation of owners.
Outside shareholders might not be part of the family, but this does not mean they’re left wanting. For example, AG Barr has one of the best dividend records around. It is debt-free and has grown or held the dividend every year since the late 90s.
Considering this record of reliable dividend growth, it is no surprise that while the rest of the market fell last week, shares in AG Barr only pushed higher. With a dividend yield of 2.1%, I reckon this drinks business would make a great addition to any portfolio.