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2 unlikely income shares I’m watching in 2023

A young black man makes the symbol of a peace sign with two fingers
A young black man makes the symbol of a peace sign with two fingers

When building my investment portfolio, I’ve always been keen to include a selection of income shares. The goal of these holdings is to generate a consistent passive income that can compound considerably over the years.

I’ve found this acts as a good form of diversification in addition to my portfolio’s expected growth and value investments.

In the past, I focused on picking companies that offer the highest dividend, thinking this was the only way to build a good income portfolio. But I’ve decided to consider a new approach to income investing that looks at companies that have paid and grown their dividends for many years. These companies may only offer a yield of 1%-2%. However, the goal of this approach is for this dividend yield to gradually increase over the years.

Ashtead Group

The first company on my list is Ashtead Group (LSE: AHT), a construction equipment rental giant. It operates in three key regions — the US, Canada, and the UK — with over 1000 rental locations worldwide. The stock currently offers a dividend of 1.5%, but is forecast to reach 1.8% in 2023.

This current yield isn’t the most impressive and is below the index average of 3.8%. However, the fact that it’s has been paid consistently for 17 years — and has grown for 16 — interests me.

Ashtead’s underlying fundamentals are also strong, with good profit margins, efficient earnings generation from capital, and reasonably low debt levels. But it’s important to note that despite the share price falling 25%+ this year, it’s still trading at a price-to-earnings (P/E) ratio of 16.4. This could suggest the company is overvalued even with its quality fundamentals.

Nonetheless, I think the opportunity to access such a consistent dividend yield is worth paying a premium for. So I’m keen to watch Ashtead in 2023 and will consider adding it to my portfolio.

RELX

The second company on my list is RELX (LSE: REL), an information and analytics business based in the UK. The company currently has a dividend yield of 2.2%, forecast to increase to 2.3% next year.

Relx has paid a dividend consistently for three decades, which is why I consider it a good income-generating share. However, the yield is lower than many examples of dividend-focused investments.

That being said, the stock is currently trading at a P/E ratio of over 26, making it quite expensive in the current market. The current yield of 2.2% is once again below the average FTSE 350 yield, so it may not justify its expensive price.

Yet RELX has very encouraging underlying fundamentals, and the consistent yield may be worth paying a premium for. Therefore I’ll monitor RELX next year to determine whether I should add the company to my portfolio.

The post 2 unlikely income shares I’m watching in 2023 appeared first on The Motley Fool UK.

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Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended RELX. 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.

Motley Fool UK 2022