These are my two favourite income stocks in 2022

Gabriel McKeown identifies two of his favourite income stocks within the FTSE 350, and outlines why he would add them to his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A young black man makes the symbol of a peace sign with two fingers

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

When building my investment portfolio, I have always been keen to include a selection of income stocks. This is in addition to the standard growth and value investments. My aim for this portion of the portfolio is to generate consistent passive income, which can compound considerably over the years.

The biggest misconception when it comes to selecting a good income-generating share is to focus on picking companies that offer the highest dividend. Instead, I like to look for companies that offer a reasonable dividend, normally in the region of 2-3%. The company should also have been paying this dividend consistently for over 20 years.

Sage Group

The first company on my list is Sage Group (LSE: SGE), a provider of accounting software. The company focuses primarily on the UK, USA, and Europe, and has been operating for almost 40 years.

Should you invest £1,000 in Abrdn right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Abrdn made the list?

See the 6 stocks

Sage has paid a dividend for 30 years and has grown that yield for the last 21 years. It currently offers a dividend of 2.6%, which — although not the highest in the index — is still a fair return if delivered consistently.

Created with Highcharts 11.4.3Sage Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The underlying fundamentals of Sage are also strong, with significant cash flow generation and considerable profit margins. However, it’s important to note that despite the share price falling almost 19% this year, it’s still trading at a price-to-earnings (P/E) ratio of 30.3. This is very high in the current market. Indeed, it could indicate that the company is potentially overvalued despite its quality fundamentals.

Nonetheless, I believe that the opportunity to access such a consistent dividend yield is worth paying a premium for. Therefore I would add Sage Group to the income stock section of my portfolio.

Diploma

The second company on my list is Diploma (LSE: DPLM), an industrial product supplier based in the UK. The company currently offers a dividend yield of 1.9%, although this is forecast to increase to 2.2% next year.

Diploma has also paid a dividend consistently for 30 years. The company has grown its yield for over 20 years. This level of consistency is why I would still consider the company a good income-generating share, despite the yield being lower than many of the typical examples of dividend-focused investments.

Furthermore, the company has very encouraging underlying fundamentals. It has significant cash generation, high forecast earnings growth, and a respectable level of earnings efficiency on invested capital.

That being said, the company is currently trading at a P/E ratio of 26.1. This is above the FTSE 250 average P/E ratio of 22 over the last 30 years. It is also worth mentioning that the current yield of 1.9% is considerably below the average FTSE 250 yield of 3.5%. This could indicate that the company may be overvalued. Furthermore, this increases the risks of share price declines over the next few years, potentially offsetting any income generated.

Created with Highcharts 11.4.3Diploma Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Despite this, I do consider Diploma to be a good income investment opportunity, as its consistent and growing dividend yield is worth paying a premium for. Therefore, I would add the company to my portfolio.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Array of piggy banks in saturated colours on high colour contrast background
Growth Shares

Here’s what analysts expect for the Tesco share price in the coming year

Jon Smith runs through the outlook for the Tesco share price using both his own opinion (and research) and that…

Read more »

Night Takeoff Of The American Space Shuttle
Investing Articles

This ex-penny stock jumped 16% today! Should I buy it for my ISA?

Our writer revisits a small-cap UK stock that he passed up on last year for his Stocks and Shares ISA.…

Read more »

Two female adult friends walking through the city streets at Christmas. They are talking and smiling as they do some Christmas shopping.
Investing Articles

How much do you need in an ISA to target a £2,500 monthly income?

Harvey Jones thinks FTSE 100 shares are a brilliant way to generate a long-term second income stream, and names a…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

These ‘boring’ FTSE 100 dividend stocks just hit 52-week highs!

Who needs to be part of the AI-frenzy when certain dividend stocks are making an absolute packet for more conservative…

Read more »

Businesswoman calculating finances in an office
Investing Articles

This FTSE 100 stock is forecast to beat Rolls-Royce in the coming year — and it’s only £1!

Rolls-Royce has been the FTSE 100 star of 2025, but analysts think this £1 homebuilder could deliver over three times…

Read more »

Mature black woman at home texting on her cell phone while sitting on the couch
Growth Shares

Down 86% over five years, this FTSE stock could be nearing the bottom

Jon Smith points out a FTSE share that has been beaten up in recent years but could start to show…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This is nuts. When’s the stock-market crash?

Share prices keep hitting record highs in 2025. The bad news for investors is that asset prices look inflated, which…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

AI wars: is the Nvidia share price under threat from rival AMD?

Up 56% in a year, the Nvidia share price looks unstoppable. But a new AI chip from rival AMD threatens…

Read more »