One solution for coping with the cost-of-living crisis is to cultivate a second income stream. The only problem with this is that there are only so many hours in a day. That’s why I’d prioritise buying dividend shares. What could be better than receiving cash from companies for just holding their stock?
With this in mind, here are two examples that I’d have no issue buying today as part of a defensive portfolio.
Still worth buying
The awful events in Ukraine have reminded all nations of the need to protect themselves. I suspect this will lead to a sustained rise in defence budgets across the board and prove a tailwind for BAE Systems (LSE: BA).
Clearly, this fact hasn’t escaped the attention of the market. As I type, BAE’s shares are up over 40% in 2022, so far. In a year of general malaise, that’s got to be comforting for existing holders.
Unfortunately, this also means BAE shares now trade at a higher valuation than they once did. A price-to-earnings (P/E) ratio of 15 might not seem high compared to your average glitzy tech share. However, it’s actually quite elevated for this company. A sudden end to the conflict could bring forth a wave of profit-taking.
Notwithstanding this, I do think it’s still a price worth paying.
Solid dividend share
When it comes to distributing dividends, BAE is a cut about the rest. But not for the reasons you might think. Relative to some stocks in the FTSE 100, a yield of 3.4% is actually pretty average. I could get (a lot) more bang for my buck by investing in a housebuilder or miner from the top tier. So why do I like it so much?
One reason is that BAE’s payout looks set to be safely covered by expected earnings. In other words, it’s very likely to be paid. Second, the company has a blemish-free record when it comes to growing its annual dividend. At a time of high inflation that really matters to me.
Bearing this in mind, I’d still be happy to buy BAE stock today, albeit for a second income rather than capital gains.
Market leader
Another FTSE 100 dividend stock I’d buy would be supermarket titan Tesco (LSE: TSCO). While it doesn’t quite have the same record as BAE when it comes to consistent hikes to its annual payout, it does have the sort of robust characteristics I look for.
Tesco’s clout is beyond question. Only last month it boasted a market share of just under 27%. That’s almost double its closest rival. Couple this with the fact that, economic crisis or not, we all need to eat and I think that makes the £19bn-cap as reliable as they come.
Second income
Income-wise, analysts have the company returning 10.6p per share in this financial year (to February 2023). This can’t be guaranteed, of course. A lot will depend on Tesco’s ability to navigate several headwinds, including keeping shoppers away from the German discounters. As always, it pays to stay diversified.
However, that payment does translate to a 4.3% dividend yield. That’s far more than I’d get from a typical cash savings account. A P/E of 11 also looks decent value for the sector.
For me, Tesco remains a great pick for tough times.
