When it comes to dividend stocks, income investors have one primary concern – reliability. All too often, promising companies with high yields end up announcing cuts or suspensions to shareholder payouts. Apart from compromising a passive income, such events also tend to send stock prices down the drain in a one-two combo.
So it’s hardly surprising that most income investors constantly seek the safest opportunities. And when it comes to dividends, the safest investments are usually from the list of aristocrats. These companies have increased their dividend for more than 25 consecutive years.
Of course, no investment is without risk. But with an incentive to keep their streak going, management teams of dividend aristocrats often seek to minimise any threats to their cash flow.
There are several such stocks on the London Stock Exchange. But the two ‘safest’ to my mind are National Grid (LSE:NG), and Diageo (LSE:DGE).
Delivering Britain’s energy
With the rise of electric vehicles (EVs), energy demand is on the rise, and it’s up to National Grid to get electricity where it’s needed. The firm owns, maintains, and operates the energy delivery infrastructure of the UK. While it’s not the most exciting enterprise, it plays a critical role that affects the lives of pretty much everyone in the country.
Revenue growth has been fairly modest over the years, as have earnings. But the incredible consistency of demand has enabled this dividend stock to be so reliable for income investors.
And it’s how management could continue raising shareholder payouts even during the most volatile times like the dotcom bubble, the 2008 financial crisis, the 2020 Covid crash, and the most recent 2022 stock market correction.
The capital-intensive nature of operations has caused loan obligations to reach concerning levels. And in the face of rising interest rates, this could pose a significant handicap. Nevertheless, the company has navigated shifting economic sands before. And I’m confident National Grid can find a way to do it again.
Drinks all round!
Diageo has been quenching the thirsts of pub-goers for decades. The alcoholic beverages business owns a vast portfolio of brands, including some of the world’s most popular, like Johnnie Walker, Guinness, and Tanqueray.
Since the planet is unlikely to go sober any time soon, demand for Diageo’s products probably won’t disappear either, in my opinion. And it’s a stance that even legendary investor Warren Buffett shares since he added this dividend stock to his portfolio.
Much like National Grid, the growth isn’t anything to get excited about. But the consistency of demand has enabled management to raise shareholder payouts for 36 years!
Operating in the alcoholic beverages arena obviously comes with some regulatory restrictions. The firm has to comply with the rules of manufacturing and distribution. And any failure to do so could result in some significant legal penalties, as investors were reminded in 2022 when Diageo was slapped with a £1.2m fine for failing to report climate pollution.
In the grand scheme of things, £1.2m is nothing compared to its £3.2bn profits. But the reputational damage is far harder to measure. And future breaches could become far more severe, especially concerning climate damage.
Regardless, the stock has yet to disappoint dividend investors. And I’m optimistic it will continue to be an excellent source of passive income for decades to come.
