Gloomy economic conditions could have big implications for investors’ dividend income in 2023. But here are three top income stocks I’d consider buying if I had cash to spare.
Redrow
The outlook for UK housebuilders remains fraught with danger. Rising interest rates, growing unemployment, and high inflation could all sap demand for newbuild homes next year.
But recent news flow suggests the housing market could perform better than expected next year. So I’m considering buying Redrow (LSE: RDW) for my portfolio. This income stock yields an impressive 6.8%.
Mortgage rates continue to drop, and the cost of a five-year fixed-term product fell below 6% again this week. This provides solid momentum going into 2023 for a market suffering an historic shortage of new stock.
I like Redrow in particular because of its low cost. A price-to-earnings (P/E) ratio of 5.4 times makes it one of the London Stock Exchange’s cheapest housebuilders. This provides a wide margin of safety and thus added protection from a possible share price drop.
NextEnergy Solar Fund
I might be better off parking my cash in NextEnergy Solar Fund (LSE: NESF) however. The rate at which green energy demand is taking off could make it a top income stock for 2023 and beyond.
The pace at which solar power in particular is taking off was laid bare by a new International Energy Agency (IEA) report. The body said this week that solar will overtake coal as the world’s main source of energy in the next five years.
This bodes well for businesses like NextEnergy Solar Fund. This particular company’s growing portfolio currently holds around 100 solar assets spread across the UK and Italy.
Today, the FTSE 250 fund trades on a forward P/E ratio of 5.1 times. It also carries a mighty 6.8% dividend yield. I find this sort of value hard to ignore, though I’m aware of the company’s high debt pile. This could put pressure on its ability to deliver generous dividend income as interest rates rise.
National Grid
I also like energy producers like NextEnergy Solar because of the defensive nature of their operations. While the global economy looks set to shrink, electricity demand should remain broadly unchanged. This provides earnings (and thus dividends) with an extra layer of protection.
For the same reason I’m considering buying National Grid (LSE: NG) shares for 2023. This FTSE 100 share doesn’t produce power, but it keeps the electricity grids in its UK and US territories up and running. It also has a monopoly on what it does, boosting its profits visibility still further.
National Grid doesn’t trade as cheaply as those other two income stocks I’ve described. It trades on a prospective P/E ratio of 14.9 times. Still, I believe its robustness merits a premium valuation.
The infrastructure business also carries an excellent 5.4% dividend yield. I’d buy it today even though it faces high capital expenditure bills. This could hamper profits (and by extension) dividend growth in the short-to-medium term.
