Investors aiming to earn a second income could do worse than looking at the UK stock market at the moment. There are a few FTSE 100 and FTSE 250 stocks that with attractive dividends.
After a series of recent declines, Diageo (LSE:DGE) has been catching the attention of passive income investors recently. But is it worth considering at today’s prices?
How much to invest?
Over the last 12 months, Diageo has distributed 75p in dividends per share. That means someone looking to earn £1,000 a year needs to buy 1,333 shares.
At today’s prices, that would cost £27,932. That looks like a big outlay – and it is – but it’s worth paying attention to how much that equation has changed over the last five years.
Back in 2020, Diageo was only paying 69p per share, so an investor targeting £1,000 a year needed 1,449 shares. And given where the stock was, that cost £36,355.
In short, the equation is much more attractive today than it was five years ago. A lower share price and a higher dividend yield means investors get more for less.
The big question, though, is what happens from here. Investors might hope the dividend will keep growing, bringing down the number of shares required further.
Yet it hasn’t happened this year. Diageo has maintained its dividend per share, rather than increasing it, and there are a number of challenges both in the near future and further ahead.
And of course, invests will hope that at some point the share price starts to rise.
GLP-1 drugs
I think Diageo has a number of competitive advantages that set it apart. So I’m not worried about risks on the supply side, in terms of other companies or market share.
My bigger concerns are on the demand side. A key threat is the rise of GLP-1 drugs which – among other things – reduce people’s desire to consume alcohol.
For some time, I’ve taken the view that investors have been overestimating this issue. But I think a couple of things recently have made the challenge more significant.
One is news that Eli Lilly is making good progress with an oral version of its drug. The US firm has a more effective product than Novo Nordisk and a tablet version should make it easier to take.
The challenge is real, but it’s important not to overstate its significance. While the majority of GLP-1 users are female, 72% of Johnnie Walker – Diageo’s top-selling product – drinkers are male.
In general, I think the FTSE 100 company has ways of tilting its portfolio towards markets that are likely to grow over time. And that’s a sign the falling share price might be an overreaction.
An income opportunity?
Diageo is currently without a permanent CEO. Whoever comes into the role is going to be facing some interesting challenges, but will also have some unique assets for dealing with it.
A portfolio of leading brands across several categories and a wide distribution network should help the FTSE 100 firm stay ahead of the competition. And that’s important when things are tough.
Over the last few years, the share price has been falling while the dividend has been rising. As a result, the stock is much better value than has been for a while – and I think it’s worth considering.
