If I were hunting the best shares to buy for income, there are a few things I’d be looking for:
- A decent, but not excessive, too-good-to-be-true yield
- A history of growing payouts over the years
- The company’s products or services are in near-constant demand
- Finances are solid enough to weather inevitable stock market storms.
With this in mind, here are three stocks from the FTSE 100 I’d feel comfortable building my portfolio around.
At 2.1%, Diageo‘s (LSE: DGE) dividend yield looks pretty low. However, I do think it’s one of the most secure. The company owns many of the best-selling premium spirits brands. It also has a massive geographical reach, meaning it’s not dependent on just one or two economies performing well.
Sure, there are risks. The global pandemic has shown that even the most robust businesses can still run into trouble as a result of black swan events. The closure of drinking dens around the world has hit Diageo’s sales and share price, even if many of us have continued to consume at home.
So long as we continue to fight back against the virus, all this should prove temporary. The fact that it’s continued to increase dividends even over the last year suggests management is confident of sales recovering strongly.
I consider FTSE 100 peer Unilever (LSE: ULVR) to be another one of the best shares to buy. Again, the income isn’t excessive. A 3.4% yield for the current year pales in comparison to what you could get from a FTSE 100 miner or housebuilder. But this is missing the point.
Like Diageo, Unilever’s appeal as a source of dividends lies in the fact its products are always in demand. A company whose earnings are cyclical is often forced to reduce its dividend payouts when the tide turns.
Of course, earnings growth may still occasionally disappoint (as it has recently), highlighting that even Unilever’s share price can run into difficulty. However, its performance over the long term shows just how rewarding it can be to buy right and wait.
Unilever also scores highly when it comes to regularly raising its payouts to investors. When a firm can do this year after year, it makes sense for me to re-invest what I receive, thus compounding returns over time.
I couldn’t think about building an income portfolio without some exposure to the utility sector. Thanks to our constant need for electricity, gas and water, these companies tends to be a rich source of dividends. That’s why my final ‘best shares to buy for income’ pick is National Grid (LSE: NG.).
Analysts have the power provider returning 49.6p per share in the current financial year. At the current share price, that becomes a yield of 5.2%. That’s a lot higher than the 3% offered by the FTSE 100 as a whole.
Again, there are some things to be aware of. Dividend cover — how well payouts are covered by profits — is a little low. The high costs involved in keeping its infrastructure running smoothly also mean dividend hikes will always be conservative. Supporting its rather dull reputation, share price progress has been fairly pedestrian too.
Nevertheless, the predictability of earnings means I’m willing to overlook these things. I’d be happy making National Grid a core holding of an income-focused portfolio.