£5,000 savings? Here’s how I would invest in income stocks

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The FTSE100 recently reached record highs. This may seem like good news, but it can actually make it harder for income investors to find high-yielding stocks.

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Given lower inflation in the UK, dividend stocks become more attractive than alternative investments such as UK government bonds, which average 4% per annum over a range of payback periods.

So I thought I’d take a look at two companies I like in terms of capital allocation to income stocks.

British American tobacco

British American tobacco (LSE: BATS) operates in… well, you guessed it, the tobacco industry. It sells products around the world, managing a more diversified business than its peers.

The company has some macro problems. The company is working challenging to continue selling many classic smoking products, such as cigarettes and cigars, in its largest market, the United States. In other countries the situation is clearer. There is also hope that BAT’s efforts to improve the situation in the US are working. For now, these classic products are still the company’s most essential way of making money, so if sales continue to decline, investors could feel even worse.

However, BAT is definitely moving towards “Building a Smokeless World.” This vision involves shifting 50% of revenue to non-flammable products by 2035. While this is a substantial change for the company, it puts it in a mighty position to lead in an industry undergoing change.

When it comes to income from investing in shares, British American Tobacco boasts a dividend yield of 9.37%.

Legal and general information (LSE: LGEN) is a significant player in the insurance and investment industries, offering a wide range of services in both areas.

The raise in interest rates causes some problems for the Investment Management Division’s assets, but the situation is improving. On the other hand, higher rates actually aid larger pension companies.

The UK market is well established, but L&G is also expanding into other countries such as the US, Canada and the Netherlands. Pensions are worth about $6 trillion in these markets, and only a diminutive portion of it is managed by insurers. This means that L&G has great opportunities for growth.

It is essential to note that L&G has a high capital adequacy ratio II, which shows how well capitalized it is. Even though it has dropped slightly in the last year, it is still well above 200%, which is a good sign of financial strength. Additionally, L&G earns more than it pays out in dividends, supporting a potential yield of 8.18%.

Good balance

If I were to allocate £5,000 to an account to generate passive income, splitting the portfolio between British American Tobacco and Legal & General would give me a high passive return (at 8.77%, more than twice the FTSE 100’s 3.5% and more than UK bond investing) and allows me to invest in companies that I think can do well in the coming years.

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