One of the ways I’m seeking to build my wealth is by investing in income stocks. I’ll reinvest my dividends to make the most of compound interest and over time, I hope to watch my money grow. But which stocks would I buy?
A defensive and reliable income stock
One income stock I like the look of is BAE Systems (LSE: BA). It has a dividend yield of 4.5% and dividend cover of around 1.25.
Just this month, the defence giant secured UK contracts worth up to £1.3bn over five years. BAE secured two contracts as part of the Ministry of Defence’s Future Maritime Support Programme project.
Possible downsides include the group being vulnerable to defence spending cuts, especially after the pandemic when there will be a lot of other competing demands on public finances.
There’s also a potential reputational risk associated with being an arms supplier to Saudi Arabia, given its track record on human rights. We know ESG investing is being taken more seriously and so if big investors don’t buy the shares, the share price might struggle.
Overall though, I think its benefits as an income stock outweigh the potential risks and I’d be tempted to add BAE Systems to my portfolio.
A solid company delivering value for investors
Admiral Group (LSE: ADM) is another reliable FTSE 100 income stock. With the new Stocks and Shares ISA allowance here, I’m tempted to add it to my portfolio. Why? Because Admiral has a track record of delivering strong shareholder returns through share price growth and a rising dividend. The dividend is why I like it as an income stock. It has increased from 114.4p in 2016 to 177.2p in 2020.
The group owns price comparison websites and also operates outside the UK. That means its earning aren’t totally reliant on the competitive UK motor insurance industry or other UK insurance segments like home and pet.
The result of Admiral’s ability to price well and share risk with other insurers (for example reinsurers), is very high returns on equity, which have averaged about 40% over the last decade. To me this is a sign of a quality company.
One downside is that the share price has already risen strongly and is looking expensive. The shares are up from 2,204p a year ago to 3,131p at the time of writing. They now have a P/E of around 18. Another is that insurance is a difficult industry in which to gain a competitive edge – customers aren’t loyal and companies compete mainly on price. But Admiral seems well run and I like its diversified business. That’s why I’d be tempted to add it this month.
Overall I think both of these income stocks could work well in my portfolio. They’re solid and dependable in my opinion. They could offer slow and steady growth as well as a dividend in most economic circumstances. They’re both defensive in nature and that means their businesses aren’t volatile or particularly reliant on the economy doing well to make revenue.
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Andy Ross owns no share mentioned. The Motley Fool UK has recommended Admiral Group. 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.