It’s no secret that British stocks offer sizeable dividend yields compared with their US counterparts, and this makes them ideal second income investments.
However, dividend yields are relative to the price of the stock. In other words, if the stock becomes more expensive, the yield falls.
UK stocks haven’t been popular for some time, but sentiment towards them is improving. As such, time really could be running out for investors seeking to earn a second income.
Things are changing for the better
In a recent note, JPMorgan analysts, headed by Mislav Matejka, highlighted that the outlook for British stocks was increasingly favourable.
So why is this? Well, the bank pointed to attractive valuations — UK stocks are cheap — more political clarity, and potentially lower bond yields.
“Labour party’s landslide victory in the recent parliamentary elections could signal an end to years of political volatility, following the Brexit referendum vote of 2016,” Matejka said.
“We believe the Labour government is likely to focus on the domestic agenda, improving growth prospects through supply side reforms,” he added.
In short, things are looking up, and politics plays a large part in this.
JPMorgan concluded the note by highlighting a host of companies, such as Sainsbury’s, Phoenix Group (LSE:PHNX), and Lloyds, which derive most of their income from the UK.
Forecasts are encouraging
One projection I often take a look at is the FTSE 100 forecast from The Economic Forecast Agency. It’s not always right, but it does provide a useful indicator for expected index performance.
The agency’s currently forecasting that the FTSE 100 — the largest 100 listed companies in the UK — will push up from around 8,200 now, to around 8,800 by the end of the year.
Even more encouraging is the projection that the index will hit 10,000 in late 2025. That would represent a 23.6% increase from today’s position.
Investing for second income
Of course, if these forecasts are correct, I should invest today for a second income.
The current average UK dividend yield’s 4.1%, and that’s more than double the broader MSCI World index. But if the FTSE 100 is to surge 23.6% over 12 months, we’d expect to see the average dividend yield fall as dividend payments are unlikely to increase by 23.6% or greater.
In terms of investments, investors may consider a dividend-paying index fund or an individual stock like Phoenix Group. It currently offers a 9.7% dividend yield and trades around 13% below the average target price.
Insurers could also be quiet winners from this new period of political and hopefully economic stability.
These tend to be quite cyclical companies. So with the UK’s economic forecast actually looking very strong on a comparative basis, and with commitments to build new homes and improve conditions for motorists, there are catalysts for insurers like Phoenix Group.
There are always risk when investing in individual stocks, as there are with funds. Some analysts may point to Phoenix’s above average leverage.
Nonetheless, there aren’t many more enticing stocks for second income investors.
I have a sizeable holding in the company because of its yield, strong business model, and potential for growth in an improving climate.
This post was originally published on Motley Fool
