Having shrunk between July and September, I reckon it’s only a matter of time before a full-blown recession in the UK is confirmed. So how should I invest in these tricky times? One option is to try supplementing my primary income using FTSE 100 shares paying handsome dividends.
As an example, here’s how I’d put £5,000 to work in five of our biggest companies.
Getting defensive
I’ve always liked BAE Systems for its superb record of increasing dividends on an annual basis, albeit not by much. As someone looking for a second income, that matters more to me than how big the dividend yield is. And with the market anticipating an uptick in orders as a result of Russia’s invasion of Ukraine, I can’t see this trend coming to an end anytime soon.
Second and third on my list of FTSE 100 shares to buy are a couple of ‘sin’ stocks, Imperial Brands and Diageo. While spending on certain things takes a backseat during a recession, sales of tobacco and alcoholic drinks tend to stay resilient, especially as these are relatively cheap luxuries that people can consume from home.
Healthcare giant GSK also makes the grade. Regardless of what’s going on with the UK economy, people still get poorly and require treatment. As evidence of this, sales increased 9% to £7.8bn between July and September, while adjusted profits rose 4% to £2.6bn, thanks in part to the success of its Shingrix shingles vaccine.
Power provider National Grid is my final pick. Yes, it’s dull as dishwater, but it’s also just the sort of stock I’d want to own during a recession for the simple reason that earnings (and dividends) are so consistent. Again, this is another stock that has a great record of increasing its payout. Last Thursday, for example, the interim dividend was hiked by 4%.
Buyer beware
As things stand, the five stocks mentioned above offer an average dividend yield of 4.6%. Put another way, I’d be in line for £230 of passive income if I invested £5,000. Interestingly, that’s more than I’d get from buying a fund that tracks the FTSE 100 as a whole (3.8%).
But is this worth the extra risk that comes from being dependent on only a few companies? Well, it goes without saying that no income stream is ever truly safe, particularly one that comes from investing in the stock market. And even if a company manages to avoid ever taking a knife to its payout during a recession, the share price can still prove volatile.
Stay in control
Ultimately, becoming a better investor involves recognising what I can and can’t control and concentrating 100% on the former. It means not speculating on when the recession will end (the Bank of England suspects mid-2024) but allocating my capital in a way that allows me to sleep at night.
So long as my cash is spread over multiple sectors (as it would be here), I’m comfortable. It’s also worth mentioning that all of these five companies make a good proportion of their profits from outside the UK.
And if drawing on this second income isn’t necessary to keep the wolves from the door, I’d be sure to reinvest every penny I receive back into the market and buy more dividend-paying shares.
