A tale of 3 FTSE income stocks: one I love, one I want, and one I won’t touch

These are the best of times for investors who like buying FTSE 100 income stocks, as there are some brilliant yields out there. Harvey Jones looks at three of them.

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The FTSE 100 is packed full of top dividend income stocks. I know, because I’ve been filling my boots lately.

So I was interested to see today’s report by Derren Nathan, head of equity analysis at Hargreaves Lansdown. He says the UK’s blue-chip index is “fertile hunting ground for attractive and sustainable yields”, and pick out his three favourites.

I hold one of them – Lloyds Banking Group (LSE: LLOY) – and I wouldn’t be without it. The high street bank’s shares have soared a stunning 48.79% over the last year. The trailing 4.44% yield has lifted my total one-year return above 50%.

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Created with Highcharts 11.4.3Lloyds Banking Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

That understates its income potential. As Nathan points out, it’s actually been a little higher than that over the last decade. The forecast yield is 5.5%.

Lloyds is a brilliant dividend growth stock

He said the cost-of-living crisis hasn’t had the expected impact on loan defaults. “There’s every reason to believe its measures of capital strength will remain above target, even if profits are down a little against some strong comparators.”

Nathan warned Lloyds may come under short-term pressures. Falling interest rates could squeeze margins, plus there is the motor finance mis-selling investigation. Like me, Nathan isn’t fazed, concluding that: “Overall, the current yield looks defensible, with scope for further dividend growth over the medium term, as well as significant share buybacks.”

Nathan also picks out oil and gas giant Shell (LSE: SHEL). It has attracted flak for easing up on net zero targets but he says: “Renewed discipline in investment decisions in both fossil fuel projects and low-carbon initiatives means that shareholder payouts are likely to remain high up the priority list.”

Crucially, Shell boasts one of the stronger balance sheets among its peers which, alongside cost-cutting measures, supports a yield of 4.4%. Nathan says: “Oil price weakness threatens to put cash flow under some pressure, but there should still be enough to cover generous dividends and further buybacks, even at current prices.”

Shell shares have also caught my eye

I’m with Nathan and would love to pile into Shell today. However, I already have a large stake in rival energy giant BP, which yields 5.59%. I’m sticking with that.

Nathan’s final income pick is British Gas owner Centrica (LSE: CNA). I’ve looked at this myself from time to time. So far, I’m not convinced. I didn’t like the way that it took a two-year break from paying dividends during to the pandemic. Most FTSE 100 companies restored theirs at a much faster lick.

Nathan says dividends are still some way below pre-pandemic levels, but its 4.2% yield is still well worth a look for income investors. 

He says the dividend looks to be on solid ground. However, he adds that investors should be aware of Centrica’s plans to invest between £600m and £800m a year into the energy transition. “On one hand, that’s a growth opportunity. On the other, it’s a risk to cash-flows if returns aren’t generated as quickly as planned.”

Personally, I’m worried at the speed that British Gas is losing customers to rivals. This could accelerate as energy switching becomes feasible again. I think I’ll put Centrica to one side. Still, two out of three ain’t bad.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in Bp P.l.c. and Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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