Ethical investing

In an era of socially responsible investing, BAE Systems is not going to appeal to everyone. The company supplies combat vehicles, munitions, and weapons systems to governments throughout the world.

And, it sells a lot of them.

Revenue in 2021 was £19.5bn, generating an operating profit of £2.3bn.

But, if I am prepared to accept the argument, that BAE Systems is helping governments fulfil their primary responsibility of providing security for their people, do I believe the company’s shares are a good long-term investment?

Doomsday

It scares me to say it, but war is a growth market.

Earlier this month, US President Joe Biden suggested that the world is facing the biggest threat of nuclear war since the Cuban Missile Crisis of 1962.

The Doomsday Clock, which is intended to convey the likelihood of a man-made catastrophe, is currently at 100 seconds to midnight, the closest it has ever been. This is not surprising given that there are currently 40 active wars or minor conflicts in the world.

And, according to the Stockholm International Research Institute, military expenditure in 2021 exceeded $2trn for the first time.

This is where BAE Systems stands to gain.

Ukraine

On the day before Russia invaded Ukraine, the company’s share price was 601p. A week later, it was 724p, an increase of 20%. Since then, it has been climbing steadily.

In contrast, the FTSE 100 has fallen by nearly 4% since the war started.

It looks as though the company is starting to see the impact of global instability on its order book.

In the first half of this year, new orders of £18bn were secured, compared to £10.6bn during the first six months of 2021. At 30 June, the total order book stood at £52.7bn — equivalent to nearly three years’ sales.

Government spending

Last year, 43% of the company’s revenue came from the US and 20% from the UK.

The US leads the world in defence spending, and racked up a bill of over $800bn in 2021.

Prior to announcing her departure, Liz Truss promised to increase the UK defence budget to 3% of GDP by 2030. That could be worth an additional £50bn a year. Governments are keen to keep military spending local, meaning BAE Systems is likely to benefit significantly from this uplift.

The defence giant is also set to gain from its exposure to the US, and the strength of the dollar. The company says a 10% increase in the dollar is worth an additional £625m of sales.

What have I decided?

Despite these positive reasons to invest, I think I have left it too late.

Although boasting of 18 years of dividend increases, the yield is currently around 3%, which is below the FTSE 100 average.

The company also has a price-to-earnings ratio of nearly 20, suggesting its shares are not that cheap.

And if, as I hope, the war in Ukraine ends soon, there is likely to be a downturn in the share price.

For these reasons, I am not going to buy, but will keep BAE Systems on my radar.

Things get better for 2023. For next year, the company’s dividend yield rises to 3.5%. However, both of these figures both fall short of the Footsie average of 4.1% by a decent margin.

But should I still buy BAE Systems for dividend growth? Here I’ll explain whether I think it’s a top stock for me to boost my passive income.

Solid dividend forecasts

First it’s worth looking at the robustness of BAE Systems’ dividend forecast for the next two years.

City analysts think the FTSE 100 firm will raise 2021’s full-year dividend of 25.1p per share to 26.5p this year and to 28.5p in 2023.

The good news is that predicted dividends are well covered too. Earnings per share of 52.6p and 57.8p are anticipated for 2022 and 2023, respectively.

This gives BAE Systems dividend coverage of two times. A figure of this or above provides investors with a wide margin of safety.

Strong capital generation gives the company extra firepower with which to meet current dividend forecasts. The business has guided for free cash flow of more than £1bn in 2022, and cumulative cash flow above £4bn between 2022 and 2024.

Budget uncertainty

So it looks in good shape for solid near-term dividend growth. But can it grow the annual payout reliably and at a healthy rate beyond then?

There’s some uncertainty on future earnings given the mounting pressure on Britain’s finances. Weapons demand from this key customer could disappoint if defence budgets are stripped back.

On Wednesday, Liz Truss affirmed government plans to spend 3% of domestic GDP on defence by 2030. This is up from around 2% at present.

But her subsequent resignation as prime minister has cast a shadow over these plans. A new leader could easily throw this key Truss pledge onto the fire.

Defence spending rises

That said, it’s my belief that defence spending in the UK and the US will likely grow from current levels. The deteriorating geopolitical situation means that governments will may take money from elsewhere to bolster arms expenditure.

During 2021, global defence spending burst through the $2trn marker for the first time. The US, UK, Russia and China were four of the five biggest spenders last year. And the arms race between these military superpowers looks set to intensify following the invasion of Ukraine.

In the sweet spot

BAE Systems’ strong relationships with the Pentagon and Ministry of Defence mean it could witness a surge in product orders. So does its expertise in areas like boatbuilding and fighter jet design. Modernising Western navies will be an area of intense focus over the next decade.

It’s true that it doesn’t offer the biggest dividend yields. But I believe the business — helped by the stable nature of its operations — is in great shape to reliably grow dividends over the long term. This is why I’d buy it to boost my own passive income if I had the cash to spare.

The defence manufacturer is up 34.52% in the past 12 months. That compares to a drop of 4.13% on the FTSE 100 as a whole over the same period.

BAE also outperformed over five years, growing 29.78%, while the index has fallen 7.95% over the same period. It’s thriving in tough times.

Beating the market

A quick glance at how the company describes itself explains why. “We design, manufacture, upgrade, and support combat vehicles and provide ammunition, precision munitions, artillery systems and missile launchers to a global customer base.”

Defence is arguably the number one defensive sector in our warlike times. Sadly, artillery, missiles and munitions are going to be in demand for some time. 

In August, BAE reported an 8.2% increase in half-yearly underlying earnings before interest and tax to £1.11bn, as its customers committed to increased defence spending. It also announced a £1.5bn share buyback.

Its earnings look set to rise even higher as the US, Europe and Asia boost defence spending to address what chief executive Charles Woodburn calls “the elevated threat environment”. JPMorgan Cazenove is now predicting around 10% earnings per share growth a year to 2025 and most likely beyond, with “quite low” risk. That’s impressive, given the harsh headwinds facing so many top UK companies at the moment.

BAE Systems also boasts a fully funded UK pension scheme, solid growth across all five divisions and a £52.7bn order pipeline. Free cash flow is solid and it pays out 50% of profits as dividends.

The FTSE 100 is packed with dividend stocks offering incredible yields, which make BAE Systems’ 3.3% forecast yield look modest by comparison. It’s nicely covered twice by earnings though.

Boom time for BAE

Perhaps the biggest surprise is that this £25bn company trades at a relatively inexpensive 14.8 times forward earnings. There are much cheaper stocks on the FTSE 100, of course. Some are available at five times earnings or less, but few enjoy as many tailwinds as BAE Systems.

As with any stock, there are risks (although unfortunately for the world, peace breaking out any time soon isn’t one of them). Servicing its £3.1bn net debt will get pricier as interest rates rise. Another danger is that markets may decide the BAE Systems share price has flown too high. If inflation falls and central bankers start easing, investors could make a tactical shift to recovery stocks.

I’m already there. While I think BAE Systems is arguably today’s best FTSE 100 growth stock, my current strategy is to buy dividend stocks as they’re available at rock bottom valuations right now. I prefer to buy stocks when they’re down, rather than when they’re up. So I might wait until BAE has fallen out of favour again. I accept that could take some years.

So, what’s going on here, and is it still worth me buying shares at this elevated price?

Is a ‘new Cold War’ brewing?

Last year at the United Nations, President Joe Biden said that the US does “not seek another Cold War”, and was not “asking any nation to choose between the United States or any other partner.”

In reality, though, most foreign policy experts believe that with the US on one side, and Russia and China on the other, a ‘new Cold War’ may have already started.

In response to Russia invading Ukraine in February, nearly all major nations around the world have been bolstering their defence systems. For example, Germany has declared a rise in its defence spending from 1.5% to 2.% of GDP, which equates to around £83bn.

The UK has committed to significantly increasing its military for the first time since the end of the original Cold War. Assuming no change of heart, defence spending will double from its current level to hit £100bn in 2030. I think this increase is unlikely to be reversed, no matter which leader is in Downing Street.

How does BAE Systems benefit?

In its 2022 half year results, BAE management said: “We see further opportunities to enhance the medium and long-term outlook as our customers commit to increased defence spending to address the elevated threat environment.”

As one of the largest defence contractors in the world, any such backdrop is obviously good news for the firm. And this can already be seen in the results. Sales increased by 2.8% on a constant currency basis to £10.6bn, but the backlog of orders rose an impressive 18% to £52.7bn.

Even after its meteoric rise, the stock has a price-to-earnings (P/E) ratio of 18, which doesn’t seem extraordinarily high to me. It also pays a dividend, with a yield around 3.1%.

Risks in the stock price

One risk I see with BAE Systems is the amount of debt on its balance sheet. As of 30 June, its net debt, excluding lease liabilities, increased to £3.1bn. In the current environment of rising interest rates, servicing this debt could get more expensive.

The biggest risk to the share price, though, is the hoped-for end to the war in Ukraine. The stock jumped in February at the outset of the war and has risen since.

As a potential investor, this last point would leave me in a strange position. I want the war to end, while knowing this would probably hurt the company’s share price. I don’t tend to root for situations that would immediately bring down the value of my investments, so I won’t be buying the shares.

Having said that, I think the heightened global tensions between the US and China will underpin healthy growth for BAE Systems over the medium-to-long term. The US remains its largest customer (at 43% of sales) and I don’t see Uncle Sam reducing defence spending in today’s geopolitical environment.

A rising silver price

The first company to which my attention is drawn is Fresnillo (LSE:FRES). For 2021, the business – a FTSE 100 silver and gold miner – paid a dividend of $0.34 per share. At current levels, this equates to a yield of around 3.34%.

The shares are up over 16% in the last three months. At the time of writing, they’re trading at 769p.

Much of this positive price action has to do with the underlying price of silver. This has increased around 5.6% in the last three months. 

What this essentially means is that the value of Fresnillo’s product is climbing. This is good news for the company.

For the six months to 30 June, however, profits fell by 54.3%. While this may seem disappointing, it’s worth noting that much of this was down to lower productivity and a weak silver price.

The threat of further pandemic-related worker absences, though, is still something I’m aware of.

Despite this, the firm has just completed the electrification of its Juanicipio mine. This development should lead to higher productivity rates in the coming months.

Safe and secure?

The second firm I’m looking at for dividend purposes is BAE Systems (LSE:BA.). In 2021, the defence company paid a dividend of 25.1p per share. This is equivalent to a yield of 2.97%. 

The company is in the latter stages of securing a deal with the UK government to build five new warships. These would be used for surveillance in the North Sea. 

Previously, it won a similar contract to construct three ships, which was worth an estimated £3.7bn. This new deal, if completed, could be very good news for the firm.

The investment business Deutsche Bank also recently raised its price target for BAE Systems from 860p to 970p. It cited an improved cash flow outlook for this change.

The firm does face the threat posed by inflation, however, and is also working to mitigate the rising prices of raw materials, like steel.

Despite this, it’s embarking on a £1.5bn share buyback scheme. This is another way I could derive income from this investment and signals a healthy company.

Additionally, it stated that underlying operating profits climbed by 8.2% for the six months to 30 June.

Overall, both of these businesses are attractive prospects for potentially deriving an income. While they face challenges, like production issues and inflation, I think they could perform well over the long term. To that end, I’ll add them both to my portfolio soon.

Having said that, recent stock market panic means that many top-quality British stocks have been unjustly sold off. The result is that many companies with good long-term outlooks now trade at a discount.

Here are three FTSE 100 bargains on my shopping list today.

BAE Systems

I’d buy BAE Systems (LSE: BA) to capitalise on rising defence spending over the next decade.

Russia’s invasion of Ukraine, and Chinese military drills around Taiwan, have upset the geopolitical balance this year. As a consequence, traditional allies in the West are taking steps to upgrade their militaries.

UK defence spending alone is set to double to £100bn by 2030, it’s been announced. In this landscape, BAE Systems should see demand for technologies like its jets, ships, and drones rise strongly. I’m expecting it to thrive despite the threat of supply chain problems in the near term.

At 845p per share, it has a P/E ratio of 16.1 times. This isn’t that cheap on paper. But I think it represents fantastic value given the manufacturer’s rapidly-improving sales outlook. JP Morgan has just slapped a £10 price tag on its shares.

JD Sports Fashion

Sports and athleisure retailer JD Sports Fashion (LSE: JD) on the other hand trades on a rock-bottom P/E ratio of 8 times. This is comfortably within the accepted bargain benchmark of 10 times or less.

Its low valuation reflects the twin pressures of sinking consumer spending power and rising costs. But it fails to reflect the sportswear giant’s bright long-term outlook in my view. I expect JD’s share price to recover strongly from current levels.

The activewear segment is still tipped for spectacular growth (analysts predict a global market worth $385bn by 2032, up 83% from current levels). And JD Sports has the brand power to make the most of this opportunity.

It also has an excellent e-commerce platform, giving it the means to exploit the digital shopping boom.

National Grid

I’m also thinking of buying National Grid (LSE: NG) shares to provide me with lifelong passive income.

Today the power transmission business trades on a forward P/E ratio of just 13.9 times. It’s a reading I believe fails to fully value the firm’s excellent defensive qualities. The essential service it provides ensures reliable earnings regardless of economic conditions. National Grid also has a monopoly on what it does.

As I say, I also think it’s one of the best stocks to buy because of its excellent dividend potential. Today it offers huge dividend yields of 5.9% for this year and 6.2% for next year.

And despite the huge costs of maintaining the power grid I expect it to continue paying good dividend yields over the long term.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Greggs 

What it does: Greggs makes and sells sweet and savoury foods through more than 2,000 stores across the UK.

By Royston Wild. Morning-goods retailer Greggs (LSE: GRG) might not be suitable for risk-averse investors. Even food specialists are suffering from weakening demand during the cost-of-living crisis. At the same time, worsening inflation is putting growing pressure on the baker’s bottom line. 

Having said that, I think it has the tools to continue growing earnings even as recession approaches. So do City analysts, who think the business will report earnings rises of 1% and 4% in 2022 and 2023 respectively. 

Sausage rolls, coffee, doughnuts, and the other goods Greggs is famous for sell well at all points of the economic cycle. What’s more, the bakery chain sells its products at low price points, giving its revenues column extra resilience when consumers feel the pinch. 

This is why like-for-like sales rocketed 22.4% during the first six months of 2022. I’m expecting another impressive report when third-quarter trading numbers are released on Tuesday, 4 October. This could give the Greggs share price a lift following recent heavy weakness. 

Royston Wild does not own shares in Greggs. 

Associated British Foods

What it does: Associated British Foods is a diversified collection of businesses that includes retail, grocery, sugar and agriculture.

By Andrew Mackie: In a worsening economic environment, it might seem strange that I would choose a company whose revenue is so heavily reliant on retail. However, with Associated British Foods (LSE: ABF) share price languishing at a 10-year low, I believe the market is missing a trick here.

UK sales at Primark have been performing well and are nearly back to pre-Covid levels. However, the same cannot be said across continental Europe where like-for-like sales are down 18%. As the cost-of-living crisis intensifies, ABF is starting to see signs of a consumer spending slow down across all markets.

Whilst retail is struggling, other parts of the business are thriving. Surging sugar prices has meant that revenues are well ahead of last year. In addition, UK sugar production is up 14%. It’s a similar story in grocery, which is benefiting from price increases across a range of branded products.

ABF’s share price is now trading 17% lower than during the pandemic. That is despite all its Primark stores being open, a successful launch of its UK website earlier in the year and an expected Christmas launch of a trial click and collect.

Opportunities to pick up cheap shares in high-quality companies with proven business models don’t come along very often. The fact that ABF is a family-run business provides me with added reassurance. That is why I have been buying more of its shares recently.

Andrew Mackie owns shares in Associated British Foods.

IG Group

What it does:  IG Group Holdings is a UK-based financial technology company providing an online platform for traders.

By Paul Summers: Given concerns over rapidly rising interest rates and a prolonged recession, I suspect global markets could remain choppy for a while. Should this be the case, spread-betting supremo IG Group (LSE: IGG) might be a great place to park my cash. 

In contrast to most listed companies, this high-quality outfit actually benefits from volatility. This may be one reason why the share price has held up fairly well (albeit still down) over 2022.   

While never guaranteed, the dividend stream also looks enticing. IG shares currently boast a forecast yield of 6%. As inflation continues to bite, that’s worth grabbing in my opinion.

Sure, there are risks here. The industry it operates in is often targeted by regulators. Competition for clients also remains fierce.

With sky-high margins and a robust balance sheet, however, I can think of a lot worse places to be invested in these tricky times.

Paul Summers has no position in IG Group

B&M European Value Retail

What it does: B&M is a leading staple & discretionary discount retailer with over 1,100 stores across the UK and France.

By Zaven Boyrazian. B&M European Value Retail (LSE:BME) is one of the UK’s leading discount retailers for both staple and discretionary items. The group operates 1,016 stores across the country under the B&M and Heron Foods brands, with a further 109 locations popping up in France.

Lately, the tailwinds from the pandemic have started dying down, causing revenue growth to seemingly stagnate. Unsurprisingly, its share price has followed, falling by a massive 50% courtesy of the stock market volatility.

However, as consumers seek to cut spending, the popularity of discount retailers is rising. And suppose the worst comes to pass and the UK falls into a recession. This could create ample opportunities for B&M to steal market share from its larger competitors.

Being a discount retailer obviously means that pricing power is basically non-existent. But with positive trends already emerging in its latest results, paired with a P/E ratio of 7.6 and a dividend yield of 5.2%, I believe Now could be an excellent buying opportunity for my stocks and shares portfolio.

Zaven Boyrazian does not own shares in B&M European Value Retail.

Greggs

What it does: With around 2,300 outlets, Greggs is the UK’s leading fast food chain. It focuses primarily on baked goods.

By Stephen Wright. In an uncertain economic environment, I’m looking for something stable. That’s why Greggs is my Best British share to buy in October.

Peter Lynch famously said that his initial interest in Dunkin Donuts came from seeing the constant queues outside – even in a recession. I feel the same way about Greggs.

From what I can see, the current cost-of-living crisis appears to be making no difference to this company. It’s easy enough to see why. 

The company’s products are familiar and inexpensive. This means that they’re less likely to get cut from the budgets of price-conscious consumers.

At a price-to-earnings (P/E) ratio of under 16, I don’t think that the stock is particularly expensive. The company also generates solid returns on equity.

There’s a 3% dividend for investors looking for passive income and the company plans to expand to 3,000 stores in the future. I’d be willing to buy shares for my portfolio at today’s prices.

Stephen Wright does not own shares in Greggs.

BT 

What it does: BT is a UK-based telecommunications company with operations in over 180 countries.

By Charlie Keough. My top British stock for October is BT (LSE: BT-A). The BT share price has failed to take off in the last five years. And this decline has continued into 2022 due to inflationary pressures. However, I think its shares could be a strong long-term buy.  

Firstly, its attractive 5.7% dividend yield is a great way for me to put my money to work at a time when stagnant cash is losing value.  

Further, I like the large infrastructure that BT already has in place. This provides the firm with, to some extent, a higher degree of pricing power. It’s also on track with its Openreach rollout, while its 5G network now covers more than half of the UK.  

What does concern me is its £19bn of debt. With interest rates rising, this will only become more difficult to eradicate. 

However, I think its solid foundations will help BT overcome the challenges it will face in the foreseeable future. I’d buy some shares this month.  

Charlie Keough does not own shares in BT.  

BAE Systems

What it does: BAE Systems is a leading defence, aerospace, and security company that serves both the UK and US governments.

By Edward Sheldon, CFA. BAE Systems (LSE: BA) strikes me as a relatively safe pick in the current environment. Given the high level of geopolitical uncertainty arising from the Russia-Ukraine crisis and the tension between China and Taiwan, governments are unlikely to reduce their defence spending any time soon.

Aside from the supportive backdrop, one thing I like about BAE Systems is the attractive dividend yield on offer. At present, analysts expect the company to pay out 26.3p per share for 2022. That equates to a yield of over 3% at the current share price. The company is also buying back its own shares – an extra reward for shareholders.  

It’s worth pointing out that if the Russia-Ukraine crisis was to come to an abrupt end, sentiment towards defence stocks could deteriorate. This could have a negative impact on BAE Systems’ share price. Overall, however, I think BAE is a good stock to own right now.

Edward Sheldon has no position in BAE Systems.

InterContinental Hotels Group

What it does: InterContinental Hotels Group operates a number of different hotel brands across the globe, including Regent Hotels, Crowne Plaza, and Holiday Inn. 

By Andrew Woods. My top British share for October is InterContinental Group (LSE:IHG). This hotel operator was battered during the pandemic, as virtually all of its hotels were forced to close. As a result, it slumped to a $280m pre-tax loss for 2020. By 2021, however, when many restrictions subsided, the business reported a pre-tax profit of $361m.

For the six months to 30 June, the firm stated that operating profits doubled to $377m. Furthermore, it announced that it was reinstating its dividend for the first time since 2019. It paid an interim dividend of ¢43.9 per share, a 10% increase compared to the same period in 2019. Moreover, it’s embarking on a $500m share buyback scheme. This is a signal that the company is in a strong financial position, although I’m always aware of the threat of further pandemic variants.

The business also offers geographical diversity, with established operations in the US and Europe, and a growing presence in China.

Andrew Woods has no position in InterContinental Hotels Group.

Reckitt

What it does: Reckitt is a consumer goods company. It primarily produces health, hygiene, and nutritional products, and is famously known for brands such as Dettol, Strepsils, and Durex.

By John Choong. As the UK heads into a recession, discretionary spending is expected to decline. However, demand for products from Reckitt (LSE: RKT) isn’t likely to wane due to its inelasticity as consumer staples, thus making it a contender for a position in my portfolio this October.

Although inflation can’t be ignored, the superiority of its brand appeal is unmatched across many of its product categories. This has allowed the group to raise the prices of its products while maintaining healthy profit margins of 22.5% in its latest half-year results, with management expecting better growth in the second half of the year. The fact that Reckitt earns the bulk of its revenue from outside the UK also makes it a safer investment due to the geographical diversity of its income steam.

Nonetheless, it’s worth noting that Reckitt’s balance sheet isn’t the healthiest. Having quite a high debt-to-equity ratio (107%) isn’t ideal in a high interest rate environment, and is something I should definitely take note of.

John Choong has no position in Reckitt.

The Bank of England stepped in to stabilise financial markets, and it looks like it has worked for now.

With falling stock prices, are there opportunities to buy Footsie shares at a discount?

I believe so, but much depends on my time horizon. As a long-term investor, I should be able to withstand short-term stock market wobbles.

Investing in the FTSE 100

Over the coming weeks and months, share prices could be driven more by factors such as interest rates, or investor sentiment. But if I plan to hold my shares for several years, I’d expect the investments to eventually become fruitful based on their fundamental attributes.

For instance, I’d look for shares that offer stable earnings growth, strong balance sheets, and sustainable competitive advantages. If my FTSE 100 picks can maintain these characteristics, I’d expect them to grow over time.

I’d also want to own big and established brands that have survived over many decades and through several market cycles.

That said, if I was investing £1,000 right now in the current market environment, I’d still want to limit my downside as much as possible. That’s why I’d focus on buying cheap but defensive businesses.

A portfolio staple

First I’d consider 100-year-old consumer goods giant Unilever (LSE:ULVR). This global business operates in over 190 countries, and its products are used by over 3.4bn people every day. It owns many established and popular brands that include Ben & Jerry’s, Domestos, and Dove.

Unilever benefits from a 15% profit margin and 15% return on capital employed. In addition, its 4% dividend yield should also provide me with regular passive income while I wait for the share price to rise.

Bear in mind that the cost-of-living crisis could lead to customers moving to cheaper competitor brands.

That said, Unilever has survived through recessions before. It’s also trading at a relatively low price-to-earnings ratio of 17x. That suggests an attractive entry point for this quality business and I’d happily buy these shares right now.

Defensive defence

Next, I’d buy aerospace and defence company BAE Systems (LSE:BA.). 2022 has seen a greater focus towards defence, and government spending in this area is set to rise.

I like that its long-term contracts provide stable cash-flow over many years. It also has a successful track record in delivering solid returns for shareholders, in my opinion. And I reckon that is likely to continue.

BAE is a world-class and technology-led business. Also, 63% of its sales are in the US and UK, where it has deep customer relationships. That said, having a concentrated customer base could become a headwind for BAE if these countries cut back of defence spending.

Overall, though, this FTSE 100 defensive defence contractor offers a double-digit profit margin, and a 3%+ dividend yield.

I’d happily split my £1,000 investment and buy both shares for my Stocks and Shares ISA.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Safestore Holdings

What it does: Safestore is a leading self-storage provider operating throughout the UK and Europe via a network of 179 locations.

By Zaven Boyrazian. Safestore Holdings (LSE:SAFE) is the UK’s largest provider of self-storage solutions, with 179 facilities around the UK and Europe. In total, the group has just over 7.6 million square feet of leasing space at an 84.3% occupancy rate as of July 2022.

While self-storage is hardly the most exciting sector, it provides a critical service that’s growing in demand and generally resilient to economic shifts.

So far this year, Safestore’s revenue has grown by a solid 15.6% overall and 12.8% on a like-for-like basis. Management has also been exercising a bit of pricing power to bolster its average storage rate by 9.1% to £28.59 per square foot. And with only a handful of fixed operating costs, net profit margins stand at an impressive 42.7%

Despite delivering consistently impressive results, shares currently trade at a dirt-cheap P/E ratio of just 3.9. Pairing this with a 3.1% dividend yield makes me believe a bargain income opportunity has emerged for my stocks and shares portfolio.

Zaven Boyrazian does not own shares in Safestore Holdings.

NatWest

What it does: NatWest is a banking firm based in the UK. It specialises in a number of products, including personal and commercial banking.

By Andrew Woods. For 2021, NatWest (LSE:NWG) paid a dividend of 10.5p per share. At the time of writing, this payment equates to a dividend yield of around 4.66%. Although that’s not the largest yield on the market, I still consider it to be solid.

The company has been benefiting from a trend of rising interest rates. Rates have risen to 2.25% in the UK and may well climb higher as central banks seek to bring inflation under control.

Higher rates basically mean that banks can charge more for borrowing services. However, since they make loans and mortgages more expensive, some customers may be put off taking on more debt amid the cost-of-living crisis.

Regardless, the firm posted an operating pre-tax profit of £2.6bn for the six months to 30 June. This was up from £2.3bn for the same period in 2021. For now, at least, the bank appears to be in a strong position and my income favourite at the moment.

Andrew Woods has no position in NatWest.

Endeavour Mining

What it does: The company owns and operates gold mines across Africa. It makes money by selling the gold it extracts.

By Stephen Wright. Shares in Endeavour Mining (LSE:EDV) just hit a price that I find it impossible to ignore them at. That’s why they’re my top British income stock for October.

As a gold mining company, Endeavour’s profitability is tied closely to the price of gold. The higher the gold price, the more money the business makes.

Recently, the price of gold has been coming down, falling from $1,756 per ounce to $1,643 per ounce. And the stock I’m looking at has fallen from £18.09 per share to £15.83.

To me, this looks like a good opportunity to buy shares. Over time, I expect the price of gold to increase and I expect all gold mining companies to benefit.

The reason for focusing on Endeavour specifically, though, is that it has lower costs than its competitors. This gives it an advantage that I think is extremely difficult to replicate.

Stephen Wright does not own shares in Endeavour Mining.

United Utilities Group 

What it does: United Utilities supplies water and wastewater services to 7m households in the North West of England.

By Royston Wild. I think buying classic defensive shares could be a good idea as stock market volatility picks up. One I’m thinking of snapping up in October is United Utilities Group (LSE: UU). 

The outlook for the UK economy is plagued with danger as inflation soars and interest rates rocket. But our essential need for water means that revenues at suppliers like this remain rock-solid.

As a consequence, businesses like United Utilities have the financial clout and the confidence to raise dividends at all times. Indeed, for the years to March 2023 and 2024 City analysts are expecting total payouts of 45.57p and 49.42p per share respectively. 

These are up from last year’s full dividend of 43.5p per share. And they provide healthy yields of 4% and 4.4%.  

I also like United Utilities because a lack of industry competition provides revenues with additional security. Though bear in mind that changes to water UK regulations could have an impact on future earnings.

Royston Wild does not own shares in United Utilities. 

Glencore

What it does: Glencore is the world’s largest commodity trader, known for trading metals that include the likes of zinc, copper, lead, and nickel.

By John Choong. Bucking the trend of the FTSE 100, Glencore (LSE: GLEN) has outperformed the wider index by more than 20%, at the time of writing. Pair that with a decent dividend yield of just under 5%, and the commodity giant certainly looks like a lucrative income stock to buy for my portfolio.

In its latest half-year results, Glencore smashed it out of the park by posting top line and bottom line growth of 43% and 820% respectively. While the outlook for metals is a rather uncertain one given the economic conditions surrounding a global recession, management believes that the reopening of China in the second half of the year could boost its income stream, and dividend as a result, while helping to hedge against declining metal prices.

Nevertheless, it’s worth noting that the miner’s dividend isn’t well covered by current earnings and cash on its balance sheet. So any substantial decline in metal prices and overall demand could significantly hamper the dividend payout. 

John Choong has no position in Glencore.

Smith & Nephew

What it does: Smith & Nephew is a medical technology company that specialises in hip and knee implants and advanced wound management.

By Edward Sheldon, CFA. Smith & Nephew (LSE: SN) shares have fallen in recent months due to challenges associated with supply chains, inflation, and China, and I think the share price fall has created an attractive buying opportunity for long-term investors like myself.

In the near term, the challenges I’ve mentioned above could persist. However, eventually, I expect them to moderate as the world returns to normal after the pandemic. And when they do, sentiment towards the healthcare stock should improve. It’s worth noting that, in many countries, there are large backlogs for joint replacement surgery.

Meanwhile, the long-term growth story here remains attractive. By 2030, one in six people globally will be 60 or over. This is likely to create strong demand for joint replacements.

With the stock currently sporting a P/E ratio that is not much higher than the average FTSE 100 P/E, and offering a dividend yield of about 3%, I think it’s a good time to be buying here.

Edward Sheldon owns shares in Smith & Nephew.

BAE Systems

What it does: BAE Systems is a defense, aerospace and security company.

By Paul Summers. Finding a high-yielding income stock isn’t hard right now. Then again, I think it still pays to be cautious. With a recession already here/on the way, many companies may reduce their cash returns or cut them completely. That’s why my pick is BAE Systems (LSE: BA).

Prompted by the invasion of Ukraine, its shares have been in fine form in 2022. This has reduced the yield to a pretty pedestrian 3.2%. Even so, payouts are likely to be covered twice by expected profit. This arguably makes the £25bn cap a relatively safe play for income hunters.  

At almost 16 times earnings, the shares trade at a premium to their five-year average. Hence, there might be some profit-taking on the horizon. However, I think this is a risk worth taking. BAE boasts a superb record when it comes to consistently increasing its annual payouts. 

Paul Summers has no position in BAE Systems

Here, I’m going to highlight two UK dividend shares I like the look of right now. Both of these stocks currently have yields of over 3%, and I think they could play a valuable role in my portfolio when I next hit the buy button.

One of the safest dividend shares in the FTSE 100?

Let’s start with defence and security company BAE Systems (LSE: BA), which is a member of the FTSE 100 index.

There are several reasons I’m bullish on BAE Systems. Firstly, the backdrop for the company is quite supportive given the high level of geopolitical uncertainty globally (Russia/Ukraine, China/Taiwan, etc). This year, the group expects to achieve sales growth of between 2-4% and earnings growth of 4-6%.

Secondly, brokers are lifting their earnings forecasts and share price targets. For example, analysts at Jefferies just raised their target price to 1,000p from 960p. This kind of activity should support the share price.

Third, the company is buying back its own shares. Recently, BAE announced a three-year share buyback programme for up to £1.5bn. This should boost earnings over time.

As for the dividend, analysts currently expect the FTSE 100 company to pay out 26.3p for 2022. At the current share price, that equates to a yield of a healthy 3.3%.

The big risk for the firm, to my mind, is that the Russia/Ukraine crisis comes to a sudden end. It’s something we all long for. But in this scenario, I’d expect defence stocks to experience some temporary share price weakness.

Overall, however, I think BAE Systems is a savvy pick for my portfolio right now. It’s worth noting that the stock’s forward-looking P/E ratio is about 15, so it’s not particularly expensive.

An under-the-radar dividend stock

The second dividend play I want to discuss is technology specialist Computacenter (LSE: CCC). This stock – which is part of the FTSE 250 – is a little more under the radar.

There’s a lot to like about this company, in my view. For starters, it looks set to benefit from one of the most dominant trends on the planet today – digital transformation. So there’s long-term growth potential here.

It’s also very profitable. Last year, Computacenter’s return on capital employed (ROCE) was 27%. Companies that generate high ROCE tend to be good investments over the long term because they have a lot of money to reinvest for growth.

Meanwhile, the dividend yield is attractive (currently around 3.5%) and dividends are well covered by earnings.

Finally, the valuation is very reasonable. Currently, the stock trades at just 12 times this year’s earnings forecast.

Of course, Computacenter is not perfect. Recently, the company has experienced some supply chain issues. These could persist in the near term.

All things considered however, I think the long-term risk/reward proposition here is very attractive.