My investing aim is to grow my portfolio over the long term. And even when I’m investing in growth shares, I’d still look to buy income stocks too.
Income stocks can turbocharge a portfolio over the long term, especially if I reinvest any dividends. This means I can buy more shares from which more income can be paid to me. And as this repeats, it’s called the power of ‘compounding’. It can actually be a very powerful way to grow my investment portfolio over the long run.
UK shares
In my opinion, one of the great ways to access income investing is through UK shares. The London stock market has historically been one of the best places for dividends.
Of course, the pandemic was a black swan event. No one could have forecast that Covid-19 would cause so much disruption that many companies had to either cut or suspend their income payments. Needless to say, it threw a spanner in the works for income investors.
Of course there’s no guarantee in any year that a company will pay out a dividend. But many do usually. Banks and oil stocks have previously been the obvious places to search for income. And while these sectors were hit hard by the coronavirus crisis, now it looks like there’s light at the end of the tunnel.
Many firms are recovering and heading back towards pre-pandemic levels of performance. This means that dividends are likely to be reinstated, which is good news for an income investor like me.
Good position
As I said, there’s no certainty that a company can pay income to its stockholders. But if it does, it tells me a few things about the firm and its board. The first one is that the it’s in a financially strong position.
It usually wouldn’t pay a dividend if it couldn’t afford it. Also, the dividend payout is a long-term thing. A board generally wouldn’t commit to it and the next financial year take it away unless there were exceptional circumstances. Last year was an extraordinary one, of course. But if payouts were cancelled in ‘normal’ times, investors wouldn’t be happy.
The second point is that if a board pays a dividend, it highlights to me that it’s shareholder-friendly. And it’s putting its investors at the forefront. This is something I look out for when analysing shares with a view to buying.
Investment ideas
There are some great FTSE 100 income stocks I can invest in. I’d buy the likes of the housebuilder, Persimmon, which currently has a dividend yield of over 8% and a relatively cheap price-to-earnings (P/E) ratio of 13x. Another one is Imperial Brands with a dividend yield of almost 9% and a dirt-cheap P/E of 6x. That said, incentives such as the Stamp Duty holiday are tapering off so this could impact the housing sector. And I need to note that the tobacco industry is facing a lot of regulation right now, which could impact profitability.
I’d also buy income stock, Aviva due to its almost 7% yield and cheap P/E of 7x, particularly as it announced that it’s going to make substantial capital returns to shareholders. There’s no guarantee this will happen, especially when the board is also focusing on reducing the over debt position. But I’d still buy for the attractive income.
