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Investing in high-yielding stocks is a popular method used by investors to earn a second income. The regular payments they provide can help fund an extra vacation each year, or ensure a more comfortable retirement. They can also be reinvested into a portfolio to compound gains and accelerate growth.
That's what I plan to do.
Recently, the price growth in FTSE 100 again FTSE 250 has declined, providing cheap high-yield stocks. This is because many companies continue to pay the same dividend even when the share price falls. So now would be a good time to pick up some dividend stocks and make a profit.
Below, there are two that I consider. Both are reliable dividend payers with an average yield of 7%. They are not great growth stocks but they deliver an industry average return of around 5% annually.
Assuming those metrics are met, a £5,000 investment will grow to £50,000 in 20 years (all returns will be reinvested). That will only pay out around £3,200 a year in dividends. But if I invest another £2,000 a year, it will grow to £200,000 – more than doubling my total contributions.
A pot that big can pay out over £12,000 a year in dividends! So all I need to do is pick two reliable stocks, each with a strong track record of growth and dividend payouts.
Have I found them?
A healthy option
Basic Health Structures (LSE: PHP) would be my top pick because of its impressive track record. Over 24 years it has paid dividends, with only two short cuts. And as a real estate investment trust (REIT), it is required to return 90% of profits to shareholders!
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It has decent growth potential as well, returning an average of 5.15% per year since its inception. So it fits my criteria well.
Naturally, a company that relies on the housing market is at greater risk during a recession. That would explain the 27% price drop over the past five years. If interest rates rise and housing costs rise, the stock may continue to fall.
Furthermore, as a healthcare-focused REIT, its profits depend on funding NHS facilities. This could see some improvement under the new government but how much remains to be seen.
A less healthy option
My second choice, British American cigars (LSE: BATS), is quite different from the healthcare REIT. But the nation's largest tobacco producer has changed its course recently. It strongly promotes healthy nicotine options while enacting stricter licensing and banning of products aimed at youth.
The company's next-generation products have enjoyed good growth recently, helped by a ban earlier this year on illegal disposable vapes. However, governments around the world are introducing strict bans on all tobacco products, including vapes. Naturally, these push profitable BAT options into an ever-shrinking corner.
Although the share price has fallen 4.2% over the past five years, its annual gains have been 6.3% since 1994. And this year has brought renewed optimism for the company, up 18.3% year to date.
So yes, the future of the tobacco industry is uncertain. But with an 8.5% yield and a solid track record of reliable payouts, I can't help but like the stock today.
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