Down 36%! Why is this recovering dividend stock in my second income portfolio?

A tried-and-tested method of earning a second income is purchasing dividend stocks and reinvesting the returns in an ISA. Here’s one I’d consider today.

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It seems everyone’s constantly pitching me the latest scheme for generating a second income. Whether it’s affiliate marketing, online courses or buying vending machines (seriously?). While some of these ideas sound promising, I just don’t have the time to dedicate to them.

Instead, I maintain my belief that the most effortless way to create a second income stream is by purchasing dividend stocks in an ISA. Sure, it takes a bit of time to grow into something substantial, but it demands far less effort than the alternatives.

For investors, a Stocks and Shares ISA helps achieve optimal returns by reducing tax liabilities. UK residents can invest up to £20,000 annually into the ISA with any profits remaining completely free from taxes.

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

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There are plenty of choices when it comes to ISAs, so it’s recommended that investors take the time to explore their options and find the one that aligns best with their personal financial goals.

What to look for in dividend shares 

A good dividend stock is one from a company with a reliable history of making regular payments. A flashy 10% yield means nothing if the payments don’t materialise! And trust me, when things get tough and profits dip, dividends are usually the first thing to get slashed.

To earn a worthwhile income, I think a dividend portfolio should have an average yield of around 6%. Yields typically range from 1% to 10%, but don’t be fooled — the highest yield doesn’t always equate to the best investment.

Here’s why I think this dividend stock makes a great addition to my portfolio.

An undervalued stock with growth potential

The British multinational consumer goods company Reckitt Benckiser (LSE: RKT) produces a wide range of health, hygiene, and nutrition products. Its key brands include household names such as Lysol, Dettol, and Enfamil

Earlier this year, a baby formula-linked lawsuit led to significant financial and reputational damage that hurt its share price. The issues appear to be resolved but any further lawsuits could hurt the share price again. For now, it’s recovered well and is up 16% in the past six months, but remains down 36% from its all-time high.

Created with Highcharts 11.4.3Reckitt Benckiser Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL8 Apr 20207 Apr 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '2520212021202220222023202320242024202520253k4k5k6k7k8k9kwww.fool.co.uk

As a well-established brand with a history of strategic acquisitions, the £33bn company also has significant intangible assets like goodwill intellectual property. However, it carries a substantial debt burden, with total liabilities amounting to £18.3bn and net debt of £8.1bn. Naturally, this is a risk that investors should consider.

A recent Q3 trading update revealed it’s on track to meet its full-year revenue and profit targets. It faced some challenges in its Nutrition segment this year due to the Mount Vernon tornado. Still, both the Health and Hygiene sectors reported strong performance, helping balance its overall growth strategy. The company’s CEO, Kris Licht, highlighted progress in reshaping its operations for efficiency and shareholder returns, focusing on a simplified business model​.

Dividend-wise, its yield is a modest 4% but based on its history, I expect this will increase. Payments have been reliable and growing at a rate of 5.62% for the past 15 years. Plus, the average 12-month price target is £54.18 — a 10% increase — so that could add to the returns.

But here’s another bargain investment that looks absurdly dirt-cheap:

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.

Mark Hartley has positions in Reckitt Benckiser Group Plc. The Motley Fool UK has recommended Reckitt Benckiser 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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