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Some defensive stocks have been falling, but that means investors have a good opportunity to earn second income from companies' dividends.
In the energy sector, the National Network (LSE:NG) share price has been below its high for some time. However, the company has been trading well and earnings have been picking up since 2023.
Looking ahead, City analysts have forecast a rise in normalized profits of just over 9% for the next business year to March 2025.
Furthermore, the directors have increased the dividend every year since 2019. So why has the share price been weak when the business appears to be doing well?
<h2 class="wp-block-heading" id="h-out-of-favour-stocks“>Out of favor stocks
Part of the reason could be a general malaise that has been weighing on stocks in defensive sectors. These consistent cash-producing companies tend to gain and lose favor with investors, and their valuations also fluctuate over time.
If there has been an exodus from defensive stocks lately, it could be due to investors rotating into other stocks that show better value, such as dip cyclicals, for example.
On top of that, in the fast-moving consumer goods (FMCG) space, some stalwarts have discovered that their brands are not as defensive as previously thought.
A cost of living crisis can test the loyalty of many consumers. Nowadays it is easy to switch to cheaper alternative products.
For example, premium alcoholic beverage company. Diageo has seen its profits and share price fall.
However, even with the shares close to 2,938p (March 27), the expected dividend yield is only just above 3%. That means the company's valuation is still quite high and it may not be the best stock to buy when looking for a second dividend income.
That said, City analysts expect profits to start recovering next year and Diageo is still a big business.
Higher yields at this time
Another that has retreated lately is the popular maker of branded consumer goods. Unileverwhich deals with personal care, home care and food products.
With its share price near 3,962 pence, Unilever now yields around 4% by 2025. That's tempting because the business is still near the top of its game. However, my first choice for a second income right now is still National Grid because the payout is higher and the dividend record looks solid.
With the share price near 1,062 pence, National Grid is yielding around 5.6% for the next trading year to March 2025.
So if you wanted to generate a second income worth £150 a month from your dividends, you would need to buy around 3,027 shares.
Taking transaction costs into account a bit, that would cost me around £32,318.
That's over a year's worth of stocks and shares ISA allocation. It would be unlikely that you would buy that many shares at once. It is much better to diversify among several stocks of companies that pay dividends.
One of the risks for National Grid is that it has a lot of debt and its activities are highly regulated. If regulators require even more investments from the company in operations in the future, shareholder dividends could be affected.
However, I still believe it's a decent stock to research and consider as part of a diversified portfolio focused on second incomes.
