I’m looking to generate a second income in retirement from a portfolio of UK dividend shares, and I feel spoilt for choice right now. While this has been another bumpy year for equities, it means income stocks are cheap and yields are sky-high. These three tempt me today.
I don’t buy tobacco stocks, but my resolve is tested whenever I look at Imperial Brands Group (LSE: IMB). It currently yields 8% a year, nicely covered 1.9 times by earnings.
Imperial Brands, like every tobacco stock, has limited share price growth prospects, because investors assume smoking will continue its steady decline. Yet the company has defended its corner by building a strong set of brands including Davidoff, West, Golden Virginia and Rizla, and expanding into alternative nicotine products such as blu.
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Still got it
Investors shouldn’t assume the Imperial Brands share price will only head south. While it’s down 12.45% over one year, it’s up 5.87% in the last month. When the next bull run arrives, I think we could see a bit more uplift.
Either way it’s cheap, trading at just 6.6 times earnings. It also makes a heap of money, with full-year revenues of £32.5bn and free cash flow of £2.36bn, even if both fell slightly. I don’t buy tobacco stocks but sometimes I really wish I did.
Happily, I do invest in housebuilders. In recent months I’ve been loading up on Taylor Wimpey, but now I’m looking to diversify within the sector, and FTSE 250-listed Bellway (LSE: BWY) has caught my eye.
Its share price is down 17.07% over five years but it’s up 17.02% over 12 months. Most of that growth came in the last month, when it bounced 18.47%, as hopes grow that we have finally hit peak interest rates. That will ease the pressure on homeowners and send mortgage rates even lower.
Bellway has had a tough year, with underlying pre-tax profit crashing 18.1% to £532.6m. House completions dipped 2.3% to 10,945 and it’s only aiming to build 7,500 homes in 2024. The end of the Help to Buy scheme hasn’t helped.
The rally could take time
That’s pretty grim but I think the bad news is now out there and housing market sentiment will pick up from here. Bellway is cheap, trading at 7.27 times earnings, while the dividend yield of 5.9% is covered 2.3 times. I’m taking a long-term view here.
Shares in FTSE 100 fund manager Schroders (LSE: SDR) jumped 10.99% in the last month, which is exactly what I would have expected. I view investment fund managers as a geared play on the wider stock market, and with shares picking up, Schroders picked up more.
Its share price is still down 13.69% over the last year but that leaves it attractively valued at 13.2 times earnings. I have no idea when the next bull market will begin, although I’m more optimistic about 2024 than I was about 2023.
All I know is that when it does, Schroders will see both assets under management and customer inflows rise, as they usually do.
While I wait, I will reinvest my dividends, which currently yield 5.4%. While a potential recession will slow the recovery, it will come, and Schroders should be a beneficiary. I’d rather buy it before than afterwards.
