Example Stocks for use in an Income Portfolio
I have been thinking about how to lay out this Blog for a while and now I am actually making a start on it I am not totally sure I am going about it in the best way, but I will crack on and see how it plays out. I realise it is going to be a Blog that Readers are particularly interested in so I will try and do it in a logical and clear way.
The ScreenShot below is taken from the extremely flexible ShareScope software I subscribe to and it you look at the Column on the Far Left (oh no, Jezza Corbyn !!) it gives a list of the FTSE350 Sectors and my plan (unless it changes as I go through) is to go through each of these Sectors with regards to their suitability for an Income Portfolio and perhaps to name some Stocks which are of particular interest within the appropriate Sectors. Judging by the scale of the task ahead I expect to be splitting this task over 2 Final Blogs for the Income Portfolio Series (hopefully the Crowning Glory and not a dismal Damp Squid of an ending….too much Blue Planet 2?)
Again I will be using ShareScope to assist me in this exercise - it is pretty good for this kind of task because it is pretty easy to sort the FTSE350 into an appropriate List with a few simple Mouse Clicks.
If you click on the Image below it should grow bigger so you can see the darned thing.
So without further ado (whatever that means or is), let’s crack on with it…….
1. Aerospace & Defence - I reckon this is a good Sector to provide potential Income Portfolio Stocks - sadly Wars will always be around and there is constant technical advancement in the Sector which keeps driving things forward to more sophisticated ways of killing people (god, this is so depressing !!). Of course for many people ethical concerns will keep them away from this Sector but as much as I get that I also feel it needs to be balanced with the need for Countries to defend themselves (the concept of a ‘Just’ War) and of course many many people are employed in this Industry with Families and suchlike. As ever, there is no such thing as a ‘clean’ ethical situation.
I hold BAE Systems BA. in my own Income Portfolio and with a Dividend Yield around 4% it fits my requirements quite nicely. BA. is very much a leading Global Defence Company and has significant interests in the US which is without doubt the largest Military Spender. Another nice angle is that it is doing a lot of work in Drone development and also has a Cybersecurity Division which is a hot area (although this is pretty small at the moment).
There are a few other decent Businesses in this Sector like QinetiQ QQ., and Meggitt MGGT but these pay quite a low Dividend around 3% ish and there have been a few Profit Warnings in the Sector recently so care needs to be taken - they might be worth considering as part of a Diversified Income Portfolio however (remember, sometimes it is not about buying the Stocks with the highest Dividend but about buying the ones where the Dividend is likely to grow over time).
2. Automobiles & Parts - This is a highly cyclical and therefore volatile Sector - it might not really be suitable for an Income Portfolio. GKN Plc GKN might be worth considering, although they have had some issues recently (Dividend Yield around 3%).
3. Banks - Again we are talking about a very cyclical Sector but I see an argument for including a Bank or 2 within an Income Portfolio - they do often pay very large Dividends in the good times which will give some cover for the bad times. Obviously in the 2008 Credit Crunch they got absolutely massacred but I suspect this was actually an extremely rare event and maybe Investing in the expectation that another Credit Crunch will happen in our Lifetimes is a major Cognitive Error (the only Event that came close was the Great Depression back in 1929 so you can see how rare such occurrences are). It is also worth bearing in mind that we use Diversification to help lower our Risk - so this should help us to some extent if we do get a major Market Collapse.
At the moment there are many troubled Banks around and the only ones I would consider are the likes of HSBC HSBA (I hold this in my own Income Portfolio) with a Dividend Yield around 5.2% and with a bias towards Asia, Lloyds Bank LLOY with a Dividend Yield forecasted to be 7.5%, Close Brothers Group CBG with a Dividend Yield around 4.5%. I note Secure Trust Bank STB is due to pay a Dividend Yield up around 4.8% - this one might be worth looking closely at.
4. Beverages - This includes Soft Drinks makers and Booze and stuff so I would expect this to be quite a stable and defensive Sector (’Strong and Stable’ LOL) and it might also have some Capital growth possibilities for some Stocks. The catch at the moment is that these Stocks have been highly in demand and the Share Prices have been driven up (so the Dividend Yields are not great), but in a Sell-off they might be an opportunity for an Income Portfolio. The ones that stand out for me are Britvic BVIC on a Yield around 3.4% (not too bad and it should rise over time), Diageo DGE on a Yield around 2.6% - this is on the low side at the moment but the Stock has Defensive qualities which might be desirable within a Diverse Income Portfolio. C&C Group CCR is on a Forward Divvy Yield around 5.5% and could be a Takeover Target as well - it is priced in Euros though because it is an Irish Cider producer so it needs careful consideration.
5. Chemicals - This Sector is cyclical in nature and as I have mentioned earlier in this Blog Series, it might be best to keep the number of such cyclical Stocks in your Portfolio at a low level. Looking at the list of Stocks in the Sector, I struggle to see much that I would consider for an income Portfolio - there are some Quality Stocks in here like Victrex VCT, Synthomer SYNT and Zotefoams ZTF but I would see these as more something for my normal Trading ISA.
6. Construction & Materials - This is another highly cyclical Sector so the usual caveats apply. Strangely this does not include Housebuilders (we will meet those soon enough) but Stocks such as Costain COST with 3.6% Forward Dividend Yield and Kier Group KIE on 7.3% Forward Yield, might be worth investigating.
7. Electricity - This should be a pretty resilient Sector - obviously if the Economy goes into a tailspin then there might be a bit of a reduction in demand for Electric Power but apart from odd blips the trend over time will be of increasing need for Power. Another Risk comes from Politics but this is a fairly unpredictable thing and Governments will be reluctant to take too much Risk with the possibility of the Lights going out. A stock which stands out is SSE Plc SSE on a Forward Dividend of 7%.
8. Electronic & Electrical Equipment - I would see this as another cyclical Sector so again it would perhaps be best not to have too many Stocks from this Sector. One to consider could be Morgan Advanced Materials MGAM on a Forward Divvy around 3.5%, but at the moment many of the Quality Stocks like XP Power XPP & Renishaw RSW have run up so much that they don’t look great for an Income Portfolio.
9. Equity Investment Instruments - this grouping really consists of the Investment Trusts and are collective investments (if you look back to Part 3 of this Blog Series I think I wrote quite a bit about Investment Trusts), which in effect mainly invest in other Shares. Therefore the catch with this Sector is that it is very much a Market ‘Proxy’ - in other words, if Stocks fall in general then these Stocks will fall with it (and might fall faster due to their Gearing in the main).
They are very much a mixed bunch and many of them are focused on Niche/Specialist areas and this often means the Dividend Yields are quite low (such Niches are very often ‘Growth’ plays rather than intended to give Investors exposure to Income Streams, and consequently are perhaps leaning more towards ‘High Risk‘ than the ideal sort of steady Plodders that might be best in an Income Portfolio) and note that REITS (Real Estate Investment Trusts) are a separate Sector and I will cover those in the Final Part of these Blogs.
So the usual caveats apply and perhaps there is scope for a Position in an Income Portfolio and the important element is to look at the Fund Fact Sheets (you can just Google Search these in seconds) and see what kind of Stocks they hold and get a sense of what their Investment Approach/Style is - remember, boring is best !!
Bearing all that in mind, the following Stocks could be worth looking at - City of London IT CTY (with just under 4% Dividend Yield); Edinburgh IT EDIN (with about 3.7% Dividend Yield); GCP Infrastructure Investments Ltd GCP (this is more specialist but has a Historic Dividend of 6.2%); HICL Infrastructure Company Ltd HICL (another Specialist with just under 5% Divvy Yield); International Public Partnerships INPP (Specialist again with about 4.2% Dividend Yield); John Laing Infrastructure Fund Ltd JLIF (more Specialism - this time with 5.5% Dividend Yield); Murray International Trust MYI (Dividend Yield 3.7%); Perpetual Income & Growth IT PLI (Divvy Yield 3.5%); Temple Bar IT TMPL (Just over 3% Dividend Yield - but remember it is important to weigh up the likely Growth Rate of the Divvy in future years as well); The Renewables Infrastructure Group Ltd TRIG (This one is potentially a bit Risky and specialist but historically paid about 5.9% Dividend Yield).
10. Financial Services - this Sector looks a right old mish-mash of quite different Businesses - it seems to contain stuff like Fund Management firms, Pawn Brokers, Spreadbetting Companies and Specialist Banks etc. Again there might be a place for one Position in an Income Portfolio and Stocks like Hargreaves Lansdowne HL. on about 2.8% Forward Dividend (might be one to buy on a drop), the Spreadbetters IG Group Holdings IGG on 5% Dividend (I hold these in my own Income Portfolio and particularly like the fact it is the Market Leader and has a big Cash Pile which makes the Divvy relatively safe), John Laing Group JLG on a Divvy around 3.5% (this is a strange one because it consists of Infrastructure Assets like Toll Roads, Bridges etc. and I would have expected it to be in with the Investment Trusts) and Jupiter Fund Management JUP on a Yield up around 5%.
11. Fixed Line Telecommunications - This should be quite a stable Sector - Stocks worth thinking about could be KCOM Plc KCOM on a Dividend Yield around 5.8% (I hold this one myself in my Income Portfolio), and Manx Telecom MANX on a yield of 6% (note this is an AIM Stock but it does have a monopoly on the Isle of Man and remarkable similarities to KCOM).
12. Food & Drug Retailers - This is a small Sector with few Stocks to choose from but the ones there are look quite interesting and it should be quite a Defensive Sector. Sainsburys SBRY is in this sector and it is a Stock I hold in my Income Portfolio - I got caught with this one fairly early on when they cut their Dividend but that has grown since then and the Forward Dividend Yield is now 4.5% which is pretty attractive. The real issue here is around the recent purchase of Argos - I am unsure how shrewd a move this is and have had my doubts but to be fair the Results that SBRY has released since then seem to show progress at integrating Argos within the SBRY Estate. Morrison (Wm) Supermarkets MRW has been through a tough patch a few years ago but seems to be back on song and as a result the Dividend is growing again and at the time of writing this Blog the Forward Dividend Yield is 2.7% which is perhaps a bit on the low side for an Income Portfolio but it is reasonable to expect it to grow over time - so there could also be some Capital Upside here as well. Tesco TSCO has also been through the mill but looks to be recovering - next year it is expected to pay 2.5% Dividend and then 2.9% the following Year - so the absolute level of the Dividend may not blow your socks off but it does seem like it can grow and of course should be quite Defensive.
13. Food Producers - This should again be a pretty Defensive Sector so it would be good to have some exposure here if a suitable Stock can be found. Dairy Crest Group DCG looks interesting - they do the ‘Cathedral City’ Cheese and ‘Country Life’ butter stuff I think - with a Forward Dividend Yield of 4.2% this could be worth serious consideration. Greencore GNC does Chilled Foods for Marks & Spencer et al with Salads and Sandwiches etc. but the Shares have been quite beat up recently - meaning that the Forward Dividend Yield is now around 3%. I think GNC might be worth a look but be careful because when a Share Price falls away for no particular Fundamental reason it could be that ‘the Market’ knows something and it might be hinting at trouble ahead. In my normal Trading ISA I hold Devro DVO which makes Sausage Skins (don’t ask !!) but this is in a nice Uptrend after some recent difficulties and looks to be recovering nicely - on a Forward Dividend Yield of 4% this could be a decent play for an Income Portfolio - it is sitting in the FTSE Small Cap Index with a Market Cap around £400m so it might be seen as relatively small (I did a Blog on DVO which you should be able to find in the Archive).
14. Forestry & Paper - in the FTSE350 there is only one Stock in this Sector which is Mondi MNDI and has a Forward Dividend Yield of 3.3%. I am not too sure about this Sector - I would see it as quite Cyclical really, so exposure to a Stock like MNDI might work out but there is some Risk here if the Economy and Market go into a Slump. As I have mentioned in one of the earlier Parts of this Blog Series, it perhaps doesn’t hurt to have some Cyclical Exposure but it is really about Portfolio Balance and not having too many Stocks that are heavily exposed to the same sort of Risks - although of course it must be appreciated that a Stock seen as ‘Defensive’ will still probably get beat-up in a general Market Slump but it will just fall less. Remember, for many Readers an Income Portfolio is likely to be an ‘Add-on’ to a Higher Risk Trading Account and if Risk is to be embraced then it might be best to do this in the more active Account.
15. Gas, Water & Multiutilities - this is more like it for a Low Risk Income Portfolio - good old tedious Utilities. Centrica CNA has many attractions but it does seem to be exposed to both the Oil Price (CNA has Oil & Gas Production Assets in the North Sea) and it gets a lot of Political hassle on the Retail Gas and Electric side which adds to the stress of holding a Stock like this. National Grid NG. is listed in this Sector and I hold it myself in my Income Portfolio - with a Forward Dividend Yield of 5.1% it gives back a nice chunk of Cash and I see it as occupying a monopolistic position at the heart of the UK’s Energy Infrastructure. It is perhaps suffering at the moment from the fear of a Corbyn Government (personally I think that is way overblown and we have seen ‘Peak Corbyn’) but the simple fact is that no Government can take the risk of the ‘Lights going out’ all over the Country which would bring back memories of the ‘3 Day Week’ and such Dark Times (Corbyn fans take note !!). Pennon Group PNN looks a decent bet and they run South West Water - with a Forward Dividend Yield of 5.3% I think this would be ideal for an Income Portfolio (but of course there is Corbyn Risk again). Severn Trent SVT has a Forward Divvy Yield of 4.3% and is another one worth considering. United Utilities UU. has a Forward Divvy Yield of 5.2% so again it could be a decent Pick. Bearing in mind the Corbyn Risk, there might be a case for holding NG. and one of the Water Companies within an Income Portfolio - both should give pretty meaty yields and a degree of stability.
That’s it for now - I will deal with the other half of the FTSE350 Sectors in the Final Blog of these Income Portfolio things.
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