Income stocks have become my comfort blanket in recent years. And right now, they’re warming up nicely.
While the US tech sector has done most of the running over the past decade, traditional FTSE 100 income stocks are finding a new audience. Rising interest rates reminded investors that dividends matter. And with markets more jittery than ever, I’ve rediscovered the joys of solid shareholder payouts.
Here are three big takeaways from my own investing experience.
1. Double-digit yields aren’t always dangerous
I’ve loaded up on UK financials such as Phoenix Group Holdings, Legal & General Group and M&G. Each has offered yields around the 9% to 10% mark, which would usually be a red flag. At that level, shareholder payouts can quickly become unsustainable.
So far, it hasn’t happened. All three have sound balance sheets and produce reliable cashflow. They may not raise dividends by much, perhaps just 2% a year, but from such a high starting point, the income still looks strong. When payouts hit my account, they really show up.
Of course, nothing is guaranteed. These stocks are as vulnerable as any other in the event of bad news. I won’t be taking anything for granted.
2. Big yields don’t mean slow growth
Income stocks can move faster than people think. Shares in Lloyds Banking Group have soared 36% in one year and 67% in two, and are still forecast to yield 5.43% in 2026.
The Phoenix share price is up 36% in the last year, while M&G has climbed around 25%.
It’s easy to assume income stocks are boring. That they just trundle along. Lately, that hasn’t been the case.
3. Growth stocks can shell out too
Games Workshop Group (LSE: GAW), which I don’t own, isn’t most people’s idea of an income stock. It’s a growth monster. But that doesn’t mean investors have to miss out on dividends.
Its share price is up 57% in 12 months and has doubled in five years. On 5 March, the Warhammer maker lifted full-year profit guidance after strong trading across its core business and licensing arm.
It’s been a remarkable run. Games Workshop joined the FTSE 100 last year, thanks to a loyal fan base and lucrative gaming royalties. It expects pre-tax profits to hit at least £255m for the year to 1 June, well ahead of analyst forecasts of £225m.
The dividend may not look huge at first glance, with a trailing yield of 2.5%. But payouts have grown at an average annual rate of 25% over the last decade.
As ever, there are risks. While the company has done a strong job expanding its customer base, any loss of interest from its core fans could dent sales and loyalty. Licensing income can be lumpy and episodic, and depend on the success of tie-ups with Amazon and games makers. At some point, its stellar growth must surely slow, but I think it’s still worth considering today.
I’m not saying every income stock will hit the mark. Some will lag. Dividends can be cut. But over time, with careful selection, investors can enjoy plenty of income. And some growth.
