Some defensive stocks have been on the slide, but that means investors have a good opportunity to nail down second income from company dividends.
In the energy sector, the National Grid (LSE: NG) share price has been below its peak for some time. However, the company has been trading well and earnings have been picking up since 2023.
Looking ahead, City analysts have pencilled in an advance in normalised earnings of just over 9% for the next trading year to March 2025.
On top of that, the directors have raised the dividend every year since 2019. So why has the share price been weak when the business seems to be trading well?
Out-of-favour stocks
Part of the reason could be a general malaise that’s been affecting stocks in the defensive sectors. These steady cash-producing enterprises tend to move in and out of favour with investors – and their valuations fluctuate over time too.
If there’s been an exodus from the defensives lately, it could be because of investor rotation to other stocks showing better value – such as fallen cyclicals, for example.
On top of that, in the fast-moving consumer goods (FMCG) space, some stalwart business have been discovering their brands are not as defensive as thought.
A cost-of-living crisis can test the loyalty of many consumers. It’s easy in this day and age to switch to cheaper alternative products.
For example, premium alcoholic drinks company Diageo has seen its profits and share price slip.
However, even with the stock near 2,938p (27 March), the forward-looking dividend yield is only running at just above 3%. That means the firm’s valuation is still quite rich, and it may not be the best stock to buy when seeking second income from dividends.
That said, City analysts expect earnings to begin recovering next year and Diageo remains a great business.
Bigger yields right now
Another that’s retreated lately is popular branded FMCG maker Unilever, which deals in personal care, home care and food products.
With its share price near 3,962p, Unilever now yields about 4% for 2025. That’s tempting because the business is still near the top of its game. However, my top choice for second income right now is still National Grid because the pay-out is higher and the dividend record looks solid.
With the share price near 1,062p, National Grid is yielding around 5.6% for the next trading year to March 2025.
So, if I wanted to generate a second income worth £150 a month from its dividends, I’d need to buy around 3,027 shares.
Allowing a bit for transaction costs, that would cost me about £32,318.
That’s more than a years’ worth of Stocks & Shares ISA allowance. I’d be unlikely to buy so many of the shares in one go. It’s far better to diversify between several dividend paying company’s shares.
One of the risks with National Grid is that it carries a lot of debt and its activities are highly regulated. If the regulators require even more investment into operations from the company in the future, shareholder dividends could suffer.
Nevertheless, I still believe it’s a decent stock to research and consider as part of a diversified portfolio focused on second income.
The post Buying 3,027 National Grid shares now would give me a second income of £150 a month appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
2 ‘super-safe’ dividend shares that have paid income for decades
3 all-star stocks I’d love to buy for my Stocks and Shares ISA!
3 top dividend stocks for passive income
Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income
Is this dividend stock a no-brainer for boosting passive income?
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc and Unilever Plc. 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.
