Income stocks were like precious metal last year amid a crunch in equities, as UK shares felt the heat of high inflation and rising interest rates in the form of share price stagnation.
But even as the FTSE 100 index enjoys a resurgence this year, I think it always pays to hedge my portfolio with passive income, namely through dividend-paying income shares. I’m eyeing a couple that could benefit from both a dividend windfall and a rebound in share value this year.
British American Tobacco
British American Tobacco (LSE:BATS) shares have been subdued this year, with investors largely unresponsive to the stock’s recent earnings.
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Earlier this month, the company released annual earnings that saw its dividend swell from a year by 6% to £2.31. Moving forward, the group continues to aim to pay out 65% of its earnings per share as dividends.
Upgraded price targets have been flooding in for the tobacco company from the likes of Barclays, JPMorgan and Deutsche Bank, giving the stock upside as high as 28%.
A downside to British American’s appeal is obviously the steady decline of cigarette demand, and the group’s unprofitable non-tobacco arm.
But these are existential threats rather than imminent ones, and it’s hard to ignore that dividend in the meantime.
I would consider adding the company to my portfolio for the next financial year while it ropes in more dividend-hunters.
Legal & General
Legal & General (LSE: LGEN) has been something of a problem child in the FTSE 100 in recent years. The company’s value is largely unchanged since 2015 while displaying volatility that would be anathema to my portfolio.
But as a result, from a price-to-earnings perspective, L&G now looks dirt cheap. The company’s 7.6 multiple is nearly half the FTSE 100 average. Also, according to analysts, the stock is bound to pop soon.
Barclays recently lowered its price target for the insurer from 397p to 390p. But that still represents more than 50% upside for the stock. Jefferies, JPMorgan and Berenberg have all projected strong upside for the stock over the next year.
There is the issue of regulatory changes, which have spooked investors under the perception that IFRS17 — a global accounting standard implemented by the sector on 1 January 2023 — could affect cash flow and drop profits by 20-25%.
Last month, though, Barclays addressed this issue by saying the changes pose a much smaller risk to its asset value than reported, as it called L&G “one of the most preferred stocks in the European Insurance sector”.
I could probably be convinced to invest in L&G with that seal of approval. And ignoring its share price performance, it’s evident that L&G has been a reliable asset for dividend investors, and this year’s forecast 8.1% return is no different.
