Building a passive income stream from dividend paying stocks is a tried and tested method many seasoned investors undertake.
The general rule of thumb is that diversification is a must to ensure maximum returns, as well as protection for my portfolio.
However, let’s say for the purposes of this article I had to choose just two stocks to build my additional income stream. I’d choose National Grid (LSE: NG.) and GSK (LSE: GSK) shares to buy.
Here’s why!
National Grid
The owner and operator of the gas and electricity transmission system in the UK is a rock-solid stock, in my view.
A big part of this is due to its monopoly on operations in the UK and its defensive traits. It’s the only provider of its kind, so competition isn’t an issue.
From a defensive view, energy is a basic requirement for all. We all need gas and electricity, no matter the economic outlook.
Both of these aspects allow revenues to remain stable, and therefore provide consistent investor rewards.
From a fundamentals perspective, a dividend yield of over 5% is attractive. This is higher than the FTSE 100 average of 3.9%. However, it is worth remembering that dividends are never guaranteed.
Moving on, the shares look good value for money to me on a price-to-earnings ratio of 15. This is slightly above average because of the level of security the stock offers, in my view.
Despite my bullish stance on the stock, there are risks to bear in mind that could hurt payouts. To start with, it has a fair bit of debt on its balance sheet, over £45bn at present. Paying this down could hurt payout levels.
In addition to this, the investment required to maintain a large, vital piece of infrastructure in the country could be hugely expensive. This investment could also impact shareholder value and dividends.
Overall, a defensive stock with a monopoly, as well as an attractive return level and valuation help my investment case.
GSK
As one of the world’s largest pharmaceutical research businesses, GSK possesses an enviable track record of performance. Furthermore, its brand power and market position are also major draws.
From a risk perspective, pharma stocks are prone to issues such as R&D complications. There is every chance that product launches, trials, and other issues could hurt GSK’s investment viability if they fail. Plus, these same issues could dent performance and returns.
In addition to this, actually creating a treatment or drug can cost millions, if not more just to bring to market. Lots of investment is required, therefore spending lots in this stage and a poor return on investment in the form of sales could hurt dividends.
However, GSK’s current burgeoning pipeline and experience offer me solace. Plus, the shares look good value for money on a price-to-earnings ratio of just 10. Plus, a forward dividend yield of just over 4% is attractive.
Finally, GSK does have a sense of defensive ability too, if you ask me. This is because demand for healthcare, pharma products and treatments are basic requirements. Plus, as the global population continues to increase, GSK could capitalise.
The post 2 FTSE stocks I’d be willing to put 100% of my money into for passive income! appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
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
More reading
If I was retiring tomorrow, I’d buy these 3 unmissable FTSE income stocks
No savings at 40? I’d buy these 2 dirt-cheap dividend shares in an empty ISA today
1 ISA, £20k, and 3 stocks. Is this the perfect recipe for a second income of £1,420 a year?
2 FTSE 100 shares I’d buy as the index hits 8,000 points!
New to investing? I’d invest my first £1,000 in these FTSE shares
Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended GSK. 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.
