3 top dividend-paying stocks I’d buy to earn a second income before a year-end rally

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I’ve spent the summer buying FTSE 100 dividend shares to generate a second income when I retire and I’m not done yet. In fact, recent stock market volatility is giving me an extra spur to buy while prices are down.

I can’t say for sure whether share prices will rally this year, but history shows that it’s more likely than not. After a bumpy September and October, I feel we’re in with a decent chance, especially with interest rates now close to their peak. However, there are no guarantees, especially if events in Gaza spiral further out of control.

Shares with rebound potential

The FTSE 100 rallied 1.73% last week but housebuilder Barratt Developments (LSE: BDEV) thrashed that climbing 9.56%. It’s now up 16.6% over 12 months, but still looks good value trading at 6.42 times earnings.

I’d be looking for income here and the 7.64% yield looks tempting. Better still, it’s covered twice by earnings. Dividends are never guaranteed, and these are bumpy times for the housing market. If we get a full-blown crash, Barratt’s shareholder payouts could quickly come under pressure.

Much now depends on whether mortgage rates continue to fall, which would lure buyers back into the market and protect Barratt’s margins. Private reservations and forward sales are down for now, and there’s no Help to Buy scheme to race to the rescue.

However, Barratt has “a strong balance sheet and a highly experienced management team”, in its own words, and the dividend income would tide me over until the share price recovers. I’d reinvest every penny, until I start drawing my gains to top up my State Pension.

Grocery chain Sainsbury’s (LSE: SBRY) also had a good week, its stock rising 7.65% after a positive market update. Management reported strong first-half grocery sales (up 10.1%) and increased its full-year outlook. That’s despite unseasonable weather hitting clothing sales (it’s a major fashion retailer via its Tu Clothing range), which fell 8.4%. The stock is now up 29.73% in a year.

We need that recovery

Sainsbury’s seems to be withstanding the onslaught of Aldi and Lidl, reporting “record” market share gains. However, the battle is far from won and high food inflation continues to squeeze shoppers’ budgets.

Trading at 11.9 times earnings and yielding 4.8%, Sainsbury’s looks like a good source of second income for me. The dividend is covered 1.8 times by earnings too, offering some security.

B&Q and Screwfix owner Kingfisher (LSE: KGF) is another FTSE 100 stock that’s still cheap despite flying last week. Its share price jumped an impressive 9.61% yet it still trades at just 7.5 times earnings. Its shares have crept up just 1.23% over the last year. So I haven’t missed the boat if I want to add this to my portfolio.

The dividend is 5.6% and that’s nicely covered 2.4 times by earnings. Kingfisher has suffered from housing market uncertainty, which hits DIY sales. It owns Castorama and Brico Depot in France, and that’s now its biggest worry as DIY spend falls sharply. Troubles in Poland, where it also operates, make its key UK and Ireland markets look relatively healthy.

I’ll keep a watching brief on Kingfisher, but I’ll buy Barratt and Sainsbury’s once I’ve built up my war chest. Hopefully, that will be before any end-of-year rally (if we get one), rather than afterwards.

The post 3 top dividend-paying stocks I’d buy to earn a second income before a year-end rally appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc. 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.

Motley Fool UK 2023