Income stocks are having a moment. While former tech growth heroes like Netflix, Meta (formerly Facebook), and Tesla Motors are crashing, UK dividend shares are in demand. That is great news for the FTSE 100, because it is full of them.
While the Nasdaq is down 29.06% year to date, the FTSE 100 has fallen just 4.85%. That’s terrific relative performance in this troubled year. After years out of favour, our blue-chip index is now one of the best performing stock markets in the world.
As inflation rockets and recession beckons, investors are dumping risky growth stocks and cryptocurrencies, and rediscovering the joys of boring old income stocks.
Income stocks are holding firm
Investing in a whizzy growth stock with bags of potential looks less attractive when inflation is high, as its future earnings will be worth less in real terms. Also, there is an even greater risk that those revenues will never come through.
By contrast, dividend stocks supply a regular stream of shareholder payouts in the here and now, which investors can take as income or reinvest for the future. Better still, dividend stocks tend to be big, established companies, with loyal customers and reliable revenue streams, which means they offer a bit of recession proofing.
There is another reason why income stocks look attractive right now. They are cheap and give me terrific yields as well. Housebuilder Persimmon now trades at just 7.3 times earnings, yet offers an incredible yield of 12.87%.
Similarly, fund manager Abrdn is valued at 11.7 times earnings, and yields 9%. Mining giant Anglo American trades at 5.2 times earning and yields 7.72%. Tobacco firm Imperial Brands is valued at 7.4 times earnings and yields 7.65.
Those are the first income stocks that spring to mind, but there are plenty more of their stripe on the FTSE 100.
Even though interest rates on cash are finally rising, I would have to lock my money away for 12 months to get more than 2%. With stocks and shares, I can get my money back at any time.
Naturally, individual company stocks are more volatile than cash savings. My capital is not guaranteed, but will shrink if share prices fall further (as they probably will, for a while).
I’d buy these solid blue chips
Also, those juicy yields are not guaranteed. They rely on the company generating sufficient profits to pay for them. As we saw in the pandemic, management is free to scrap or suspend dividends in tough times.
There is always a danger that your chosen company could go out of business. Yet the companies I have listed above, and many more on the FTSE 100, look solid to me.
Even if we fall into a bear market and recession, they have the financial muscle to see it through to the other side.
Most should continue paying their dividends throughout. By re-investing my regular payouts, I can pick up more of their stock at a lower price when markets are down.
When markets finally recover, as history shows they always do in the end, the shares I bought at market lows will be worth more.
So yes, I would buy top FTSE income stocks today. Then I would hold them for years. Or ideally, decades.