Generating a second income from dividend stocks is relatively straightforward as long as I remember it isn’t guaranteed.
Even so, I think there are some UK companies that are likely to be more reliable than most going forward. I’d buy these three if I had some spare cash.
Resilient business
I’ve banged the drum on soft drinks firm Britvic (LSE: BA) from a dividend perspective for years now. The reasons for this are very simple.
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Thanks to producing small-ticket items that people buy out of habit, the FTSE 250-listed company’s earnings are reassuringly stable.
This predictability means that the £2bn cap regularly hikes its annual dividend. Lockdown-heavy 2020 has been the only blip recently.
As things stand, Britivic yields a solid if unspectacular 3.7%, and higher payouts are definitely available elsewhere. However, this usually comes with a greater risk of a cut.
In contrast, analysts have the dividend covered nearly twice by expected profit here — just the sort of buffer I like.
My concern is debt on the balance sheet. Right now, this looks manageable. However, I wouldn’t want to see interest rates rising since this could lead to a revision of the dividend policy.
Boring but beautiful
Moving up to the FTSE 100, I’ve always regarded international distributor Bunzl (LSE: BNZL) as boasting solid dividend credentials.
Coffee cups, hygiene supplies, safety masks — these are the sort of things it specialises in delivering. It’s hardly exciting stuff. But it has allowed Bunzl to generate higher revenue and profits nearly every year.
Based on analyst forecasts, the yield here is just 2.2%. However, the stock is up 35% in value in five years — a far better performance than other FTSE 100 companies offering higher payouts.
That’s vital for dividend hunters to grasp. Owning a big-yielding stock can backfire if my money is being slowly eroded by a declining share price. A lower yield from a better-quality stock is surely preferable.
Most importantly, Bunzl is a business that has been raising the amount of money it pays out every year for decades.
Then again, one should never get too comfortable. Supply chain disruption and overpaying for acquisitions are still risks.
Monster yield
Another top-tier stock I think is always worth consideration is power provider National Grid (LSE: NG).
Like Bunzl, this isn’t a company that gets the pulse racing. But that’s why I like it. The best dividend stocks tend to be those where the product or service provided is unspectacular but hard to do without.
At nearly 6%, the Grid also offers the highest yield of the three stocks mentioned here. And while the cover may be a lot lower, the essential nature of what it does suggest that a cut is less likely to happen. The last reduction was in 2018 and this was just 5% from the previous year. It’s been rising consistently since then.
Again, there can be no guarantees, even with utility stocks. It’s also worth mentioning that the £42bn of net debt on the balance sheet at the end of last year is more than that of the entire company!
However, the direction of travel for the share price has undoubtedly been up over the years, making me believe this could be a core holding in a ‘super safe’ portfolio.
