UK income stocks have swung back into favour over the last year, and about time too. Growth has ruled the roost for far too long.
I feel far more comfortable buying undervalued dividend-paying FTSE 100 stocks, than chasing the growth bandwagon. While their share prices are unlikely to rocket, they’re much less likely to crash and burn. Plus I get a regular stream of dividends, which I reinvest for growth through thick and thin.
I’m raiding the FTSE 100 for dividend stocks
I’m looking to build a retirement portfolio of around 12 to 15 income stocks, which should give me capital growth and a rising income stream over time. As a value investor, I prefer to buy when shares are dirt cheap. Who doesn’t like a bargain?
That was easier last autumn, when the FTSE 100 dipped to 6,826. Right now it trades at 7,772, almost 14% higher. I wouldn’t buy a FTSE 100 tracker today, with the index trading so near its all-time high of 7,903.50. Instead, I’m hunting around for income stocks that have missed the recent rally, and remain cheap as a result.
Happily, there are plenty to choose from. There’s a shadow hanging over the property market as the UK economy struggles, and this has made housebuilders cheap. Barratt Developments, for example, trades at a lowly 5.5 times earnings and yields a thumping 8.07%. Rivals such as Persimmon and Taylor Wimpey have a similar profile.
Naturally there are risks, as house prices could fall sharply this year. But I’m investing over a minimum span of 10 years, and preferably longer, which gives the sector plenty of time to recover and for my dividends to roll up.
Mining stocks also offer high dividends at low prices. Anglo American trades at 6.5 times earnings but yields 6.59%, while Rio Tinto looks even better value with a price-to-earnings ratio of 5.9% and a thumping 10.11% income.
I’m looking a financials too
Commodity prices could fall if the world suffers a deep recession, but with China reopening, demand is just as likely to increase. Over the longer run, I think those dividends are unmissable regardless of what happens in the next year or two.
The FTSE 100 financials sector also looks like a happy hunting ground for income stocks, with Lloyds Banking Group trading at 6.8 times earnings and yielding 3.39%, while Aviva has a P/E of 10.7 and yields 6.37%.
I personally don’t buy tobacco stocks but for those who do, British American Tobacco fits my criteria as it’s valued at 9.3 times earnings and yields 7.04%. Similarly, Imperial Brands yields 6.96% with a valuation of just 7.6 times earnings.
In recent months, I’ve put my money where my mouth is by purchasing Lloyds, Persimmon and Rio Tinto from the companies named here. I would happily top up my holdings at today’s prices but instead will shift into a new sector, for diversification. When I have some spare cash, Aviva will be near the top of my buy list.
