Income stocks, also known as dividend stocks, are companies that reward shareholders in the form of regular payments.
These stocks are particularly useful for those of us who invest in order to receive a second, or passive, income.
However, while I’m not investing in that way today, I still own many such stocks. That’s for several reasons.
First, it’s about diversification, as these companies are often more mature and offer something different to other parts of my portfolio — often more resilient to market fluctuations.
They work into a compounding strategy too. I don’t take the dividends as a second income, I reinvest them.
So, what do I think are the best income stocks to buy this January? Let’s take a look.
Insurers
Now could be an attractive time to buy dividend stocks: several forecasts anticipate rising share prices this year as interest rates fall.
This phenomenon happens because capital flows away from debt, bonds, and cash when interest rates fall. In search of a stronger return, people invest in shares.
And as we know, share prices and dividend yields are linked. In other words, as share prices go up, dividend yields go down (but of course, the risk is that falling prices stay fallen).
Some of the best yields can be found in insurance. I have both Legal & General and Phoenix Group in my portfolio.
While their share prices haven’t grown much this year, I’ve received dividend yields of around 8.5% and 10%, respectively.
And that contributes to my aim of achieving low-to-medium double-digit growth, providing relative security of returns versus growth stocks.
These insurers don’t have the strongest coverage ratios at 1.98 times and 1.6 times. However, cash generation is strong in the insurance business, meaning dividend payments can be met.
In the US, I own ManuLife Financial. The stock has a much lower dividend yield of 5%, but stronger coverage at 2.5 times, and looks undervalued despite rising 23% since adding it to my portfolio.
Banks
Banks, the UK-focused ones at least, still look undervalued. And by that I mean Barclays, Lloyds, and NatWest. There are several reasons for this, but narrowing net interest margins and ongoing bad debt concerns are a large part of it.
They’re all good choices, in my opinion, but Lloyds with its 5.1% dividend yield, and 3.08 times coverage is perhaps the strongest option. Given forecast dividend increases, the stock’s forward yield could reach 7.8% in 2025.
Energy and minerals
Energy and mineral stocks are among those that tend to offer strong returns. Traditional ones like BP have slumped in recent months, and the dividend yields have pushed up accordingly.
Nonetheless, I’d be inclined to invest in Greencoat UK Wind — if I had the capital. It underperformed in 2023, but there’s plenty of momentum behind wind energy, and the dividend yield is a strong 5.25%.
Likewise, some miners have underperformed recently, partly because Chinese growth is expected to slow. Could this be a good time to jump in? It definitely requires a deep research dive.
Nonetheless, Rio Tinto‘s dividend yield is back up to 7.7%, while lithium miner Sociedad Química y Minera de Chile has seen its yield push into double digits — given the upheaval in Chile, it carries a lot of risk right now, but it might be worth the reward.
