I am keen to go shopping for dividend stocks, as share valuations fall and yields rise. There are so many tempting income shares on the FTSE 100, I’m having trouble making my choice. The following three jump out, though.
To offer some respite against current volatility, I would consider buying dividend aristocrat National Grid (LSE: NG). It looks cheap today, with the share price falling 25% in the last six months. That has depressed its valuation to just 14.8 times earnings.
I do not expect much share price growth from National Grid. Its stock still trades at roughly the same level it did five years ago, while earnings are tightly regulated. But it has offered a solid income stream for years, and today the yield is a healthy 5.6%. That kind of income offers me some protection against today’s raging inflation.
Dividend stocks fight inflation
Trading has been solid so far this year with revenues been boosted by the strong US dollar. The group owns gas and electricity distribution across the Northeastern US and these revenues are worth more once converted into pounds.
Rising interest rates pose a problem for many sectors but banking is a rare exception. Higher rates allow them to widen net interest margins, the difference between what they charge borrowers and pay savers.
I’m turning my attention to NatWest Group (LSE: NWG), which now trades at just 9.3 times earnings after falling almost 10% in the last month. Again, long-term share price performance is underwhelming, as it is down 5% over five years. However, its 4.93% yield should keep me happy while I wait for its shares to recover.
Results have been good lately, with pre-tax profits jumping 13% to £2.6bn for the six months to 30 June. Management now expects a full-year return on tangible equity of 14%-16%, up from prior estimates of 10%. A recession and house price crash would hit customer confidence and increase debt impairments, but that risk is reflected in the low share price.
This stock really excites me
My final and perhaps most exciting dividend stock is consumer goods giant Unilever (LSE: ULVR). I’m excited, because the stock trades at around 17 times earnings, when its valuation is usually closer to 25 times.
Similarly, the yield is now 4.43%, when I’m used to seeing it closer to 2.5%. The reason for these figures is that the Unilever share price has floundered, falling 3.75% over one year and 11% over five years.
Management has struggled to get a grip on poor performance, but now there are signs of a turnaround.
Its new business unit structure should cut costs and speed growth, and analysts at Berenberg recently hiked its share price target from £40 to £48 as a result. It currently trades around £39. Again, I’m not expecting a sudden share price spike — these are uncertain times. I appreciate the risk of investing in Unilever when its customers are feeling squeezed, but here’s why I’d still buy it.
I’m treating all three of these dividend stocks as long-term buy-and-hold investments. Today’s low valuations make now a good entry point.