Although I like growth shares, income shares can also play a valuable role in my diversified portfolio. Income usually takes the form of dividends and share buyback schemes. I’m wondering whether these two companies are the best income stocks for me to buy this year. Let’s take a closer look.
Diageo (LSE:DGE) has been a solid performer over the past number of years. The shares are up by around 0.5% in the past year, down 12% in the last three months. They currently trade at 3,500p.
The company – an alcoholic beverages producer – is in the advanced stages of a share buyback scheme. In total, this scheme amounts to £4.5bn and the firm should pay the final tranche by the middle of 2023.
As a potential investor, this income stream from share buybacks is attractive. In addition, the business paid a dividend of 72.55p for the year ended June 2021. This equated to a dividend yield of 2.1%.
Diageo’s dividend policy has been quite consistent over the past five years, with slight increases to the amount paid. It’s important to note, however, that dividend policies can be subject to change.
There is the risk of falling demand for the company’s products due to the cost-of-living crisis and inflation. This concern prompted Deutsche Bank to downgrade the shares to ‘sell’ and lower its price target from 4,050p to 3,230p.
Secondly, I’m drawn to Persimmon (LSE:PSN) as an income stock. It currently trades at 1,813.5p.
The household construction firm has a strong forward order book amounting to £2.8bn. Furthermore, the first quarter of 2022 showed sales growth of 2%, year on year.
In addition, the company had only £8.8m of debt at the end of the last quarter and a healthy cash balance of £1.25bn. When I consider adding a business to my portfolio, a solid cash balance is something I find appealing, as it allows companies to manage debt and grow at a sustainable rate. It should be noted, however, that past performance is not necessarily indicative of future performance.
In 2021, Persimmon paid a dividend of 235p per share, which equated to a dividend yield of 8.2%. Like Diageo, Persimmon has been consistent with its dividend policies.
With rising interest rates, however, it’s possible that there may be a slowdown in the housing market. As mortgages become more expensive, potential homeowners may be deterred from buying. This could be bad news for the firm, because it may see a decline in demand in the coming months and years.
Overall, these two companies have performed strongly in recent years and could provide a solid income stream given their consistent policies. While this is obviously not guaranteed, I will add both businesses to my portfolio soon in the hope of benefiting from passive income alongside long-term growth.
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Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.