I reckon a second income stream is a very realistic possibility from buying dividend paying stocks. However, it’s worth remembering that dividends are never guaranteed. With that in mind, I’m looking for quality stocks with as safe a level of return as possible.
For example, if I had £2K to invest right now, I could buy 119 shares of National Grid (LSE: NG.) and Unilever (LSE: ULVR).
A breakdown
National Grid is the owner and operator of the gas and electricity transmission in the UK. It has no competitors, which is an added advantage.
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Unilever is one of the largest consumer goods businesses in the world with a great reach as well as immense brand power.
With £1K I could buy 94 shares of National Grid shares at £10.54 a share. With the other thousand pounds, I could buy 25 shares in Unilever for £39.21 a share.
As the chart below shows, both stocks have been hurt by macroeconomic volatility. However, this turbulence has just made the shares cheaper, and more attractive to me!
Bullish traits and risks to note
For me, the dividend yield on offer, as well as the current valuation of both stocks is enticing. The table below breaks down how both shares look like good value for money using the price-to-earnings method of valuing shares.
| Company | Dividend Yield | P/E Ratio |
| National Grid | 5.48% | 5 |
| Unilever | 4% | 16 |
From a bullish perspective, National Grid’s lack of competitors means that revenue and investor returns often remain pretty stable. This is attractive for me as a dividend seeker. In addition to this, energy is a requirement for all, which offers the stock a great defensive ability.
On the other side of the coin, maintenance of an expensive piece of key infrastructure can be expensive. This could hurt payout levels. Furthermore, there is a looming spectre that the government could intervene and look to cap its investor return levels.
Taking a closer look at Unilever, it’s brand power and profile is enviable. It covers household goods, food, and more across the globe. A recent strategic review could catapult performance and returns to new heights. The firm is looking to dispose of lesser performing brands and invest further into better performing ones.
Conversely, as the recent cost-of-living crisis has shown, consumers are looking to make their budgets stretch further. The allure of cheaper non-branded essentials could hurt Unilever’s performance. Plus, soaring costs and shipping issues could dent it too. I’ll keep an eye on updates on this front.
Reinvesting dividends
It’s worth mentioning that if I want to bolster my second income stream, I could reinvest my dividends received into more shares of these stocks, or other dividend paying stocks too. Plus, I could look to invest regularly, a set amount a month for example, into such stocks to help speed up my goals.
Right now I don’t have two grand lying around. However, the above example is how it is entirely possible to buy quality dividend stocks, on a good valuation, with defensive and attractive traits to achieve a passive income.
