Yahoo Finance The income stocks that will earn you £1,400 extra a year
Savers could earn £3,400 this year by putting £5,000 each into 10 dividend-paying stocks.
If you want to supplement your salary (or pension) with income from investments, dividends from shares are an obvious source – and the London stock market is a great place to hunt for companies that pay big dividends.
The FTSE 100 has an average yield of 3.9pc, so someone with a £50,000 portfolio would earn about £2,000 in divis this year. But an investor could earn £1,400 more by choosing particular stocks.
However, simply buying the stocks that offer the highest dividend yield (the annual dividend as a percentage of the share price) is risky, as a high yield can be a sign that a dividend is not sustainable. So it’s important to pick the companies with the best chance of maintaining, or even increasing, their dividend.
Luckily, there are ways to identify the most reliable businesses. Joe Hill of the stockbroker Hargreaves Lansdown said: “When looking for a good income stock, look for a strong balance sheet – ideally one that has net cash, rather than debt [the company’s annual report will give you this information] – as well as an attractive yield. A history of increasing dividends is also a good sign.”
His colleague Aarin Chiekrie said it could be worth looking at a company’s debt levels relative to cash profits.
“By comparing net debt to cash profits [which you can also get from the annual report], you get a snapshot of the company’s financial health. If the ratio is less than one, it means the company’s annual cash profits cover all its debt obligations and the dividend is on solid ground.”
Hargreaves Lansdown has identified 10 British and American stocks that offer healthy-looking dividend payments.
According to the firm’s analysis, investing £50,000 in the US stocks below would yield £2,370 this year, whereas those who invested in its 10 British stock picks would make £3,400 – £1,400 more than the FTSE 100 would pay in dividends.
Figures are before fees and taxes and based on current share prices and forecast dividends.
Mr Chiekrie said: “Of those companies that screen well, some really stand out. Legal & General’s balance sheet looks strong, meaning it should be able to ride out tougher times if they come along. And with cash generation exceeding dividend payments, the forecast dividend looks well supported.
“United Utilities runs a tight ship, with some of the best margins of its peer group. Its regular cash flows and inflation-linked revenue are enviable assets in an uncertain environment.”
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It is important to make sure your portfolio is well diversified across different regions and economic sectors because dividends can fluctuate according to market conditions. For example, mining companies sell volatile commodities, while banks can be more sensitive to the economic climate.
How often companies pay dividends varies. Most pay at least twice a year and some pay quarterly. The calendar below shows when big dividend-paying companies normally pay their dividends.
If you do not like the idea of buying individual stocks for income, a fund could be a better choice for you.
Mr Hill said: “We think the Artemis Income team is one of the best in the business and are well placed to make the most of UK income opportunities.
“Janus Henderson UK Responsible Income offers something different by avoiding so-called ‘sin stocks’, such as tobacco and oil and gas companies, which feature heavily in traditional income funds because they pay relatively high dividends. This fund could therefore offer some diversification to a traditional income portfolio or be a good addition to a responsible portfolio aiming for income.”
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