If you’re relatively new to the stock market and are wondering how to get started, I’d suggest building a portfolio of FTSE 100 dividend stocks.
These companies are large, well-established, and are usually consistently profitable. Most pay regular dividends, so investors can look forward to a cash income.
In this article, I’m going to look at two companies I think could be a good starting point for a FTSE 100 income portfolio.
Ahead of expectations
Housebuilder Barratt Developments (LSE: BDEV) issued a strong update on Wednesday, advising investors that profits for the year to 30 June are expected to be ahead of previous forecasts.
Pre-tax profits for the year are now expected to rise by 9% to £910m. My calculations suggest this is about 3% ahead of City analysts’ forecasts — a solid performance.
Why are profits rising? One reason is that the number of homes built by the company rose by 2.6% to 17,111 last year. But a second reason for the firm’s strong profit growth is that its profit margins are increasing.
Barratt’s operating margin rose by 1.2% to 18.9% last year, thanks to initiatives including offsite construction (e.g. timber frames), which are reducing build costs and offsetting higher labour rates.
Although Barratt’s profit margins aren’t as high as some rivals, I believe this is one of the top quality operators in the sector. Barratt has now received a five-star Home Builders Federation customer satisfaction rating for the last 10 years. By contrast, FTSE 100 rival Persimmon received a rating of just three stars last year.
In my experience, investing in companies that provide a high quality product that’s liked by customers is rarely a bad idea.
Is the price right?
Barratt shares were flat this morning despite the firm increasing its profit guidance. This reflects the strong bearish sentiment towards housebuilders in the market at the moment.
The risks are obvious — Brexit could trigger a market downturn and the lucrative Help to Buy scheme is due to end in 2023. Even without these risks, many would argue that we’re due for a housing slowdown after such a long period of growth.
However, Barratt stock doesn’t look especially expensive to me, trading at about 1.3 times book value and on eight time forecast earnings. The 7.6% dividend yield looks well supported. If you believe housing demand is likely to remain stable, then I think Barratt could be a decent buy.
A defensive play
One thing that doesn’t much change in a recession are our supermarket shopping habits. We still need bread, milk, cheese and fresh produce. And we’re unlikely to change our regular shopping locations.
One of my top picks in the supermarket sector is Bradford-based Wm Morrison Supermarkets. I rate the chief executive David Potts and his team highly. I also admire the group’s largely freehold store estate and in-house food production business. This is powering a move into wholesale and a growing supply deal with Amazon.
I would also say that Morrisons is small enough to be a potential takeover target in the future, although I wouldn’t buy the shares on this basis.
What does attract me to the stock are the group’s low debt levels and strong cash generation. The shares currently trade on about 14 times earnings and offer a 4.6% dividend yield. I believe this rating could offer decent value for patient investors.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. 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.