With market turmoil sending stock prices into the gutter, plenty of dividend shares are looking increasingly attractive. Why? Because lower valuations combined with sustained shareholder payouts result in higher yields. And that can give quite a considerable performance boost to an income portfolio.
Obviously, the current state of the economy, while improving, isn’t ideal for most businesses. And with households slowing their spending, achieving growth, or even just maintaining existing earnings, is proving to be quite challenging for most companies.
However, there are always exceptions. So if I had £5,000 today, what would be the best FTSE income stocks to buy right now?
Focusing on the long term
Searching through high-yield stocks today can be a fun exercise when looking for lucrative income opportunities. But in the long run, this approach may not deliver the best results. After all, a high payout is ultimately worthless if it can’t be sustained. And even if a company can’t keep up, the return may disappoint compared to a modest yielding stock with the capacity to grow payouts over time.
Since I’m interested in the latter, my focus should be on the companies whose products or services are likely to continue rising in demand for years, or even decades.
Fortunately, the London Stock Exchange is home to many of these enterprises. And the sector that’s caught my attention most recently is energy.
Renewables are money-making machines
It’s no secret that electricity prices are on the rise. There are a lot of moving factors influencing the price of energy. But in the UK, it’s pretty much determined by the cost of natural gas. Why? Because gas turbines are largely what’s powering the National Grid.
However, that’s created quite a favourable tailwind for renewables like wind and solar power. Apart from fueling a desire to move away from fossil fuels to lower energy costs, the current price inflation of electricity is enabling wind and solar farms to generate enormous levels of revenue and profit.
In fact, when looking at a firm like Greentcoat UK Wind, ignoring the non-cash movement of asset values on the balance sheet, profit margins as of June stand at 92%!
That means more money to expand and accelerate the shift to renewables while shareholders get chunkier dividend payments. And since demand for electricity is set to rise considerably over the next decade, investing £5,000 in the environment could be an exceptionally lucrative move right now.
Every investment has risk
As wonderful as this bonkers level of earnings sounds, it’s not going to last forever.
Higher profitability entices more investment from competitors and start-ups that increase supply. If growth in supply eventually outweighs demand, energy prices drop, taking profit margins with it. And unlike other businesses, energy companies don’t have much in terms of pricing power since the value of their products is determined by the market.
Nevertheless, the impressive cash flow generation from FTSE renewable energy companies, paired with long-term demand for electricity, make it a risk worth taking in 2023. At least, that’s what I think.