Two top FTSE 100 income stocks for conservative investors

The last few years have not been kind to conservative value investors as the prices of high-income, low-risk stocks have significantly lagged behind those of sexy growth stocks. But with the next recession potentially around the corner, the time for conservative investors to shine may not be far off.

High margins equals high dividends

One stock that should survive the next downturn in better nick than hot growth stocks is boring old tobacco giant Imperial Brands (LSE: IMB). The cigarette seller’s stock currently yields a whopping 6.74%, so investors are already being richly rewarded for investing in one of the market’s most out-of-favour sectors.

This yield, a nearly decade-long history of 10%+ dividend hikes, and a valuation of just 10 times forward earnings all make it one of the few true value standouts in the FTSE 100. However, this valuation isn’t without reason as the group, alongside the sector as a whole, is confronting very real problems in the form of declining rates of traditional cigarette smoking and market share gains from upstart competitors in the growing market for non-traditional smoking devices such as vaping.

In the first half of they year, this led to IMB reporting a 2.1% drop in constant currency net revenue to £3.5bn and a 2.2% downtick in adjusted operating profits to £1.6bn. Six months of results don’t tell the entire story though as IMB is making good progress in taking market share in key markets such as the UK, Japan and Germany and is investing in growth brands in places such as the US that should drive continued long-term profit growth.

Furthermore, although the business is already highly, highly profitable, management is still wringing out further cost cuts that are already driving both dividend increases and deleveraging of the balance sheet.

All told, the halcyon days for tobacco makers are undoubtedly behind them, but global giants like IMB still have billions of smokers to sell to and through consolidation and cost-cutting have the potential to keep driving significant profit growth. This won’t earn them a growth stock valuation, but for conservative investors seeking income and defensive characteristics, I reckon IMB could be a top choice.

Shifting goods consumers always need to buy

Another FTSE 100 defensive that’s looking interesting to me is Reckitt Benckiser(LSE: RB), which sports a forward valuation of 19 times earnings and kicks off a decent 2.6% dividend yield.

The group’s defensive characteristics are strong thanks to selling everyday items from Durex condoms to Lysol cleaners and Clearasil skin treatments. In the first six months of this year, sales of these goods were strong and sent group-wide revenue up 4% on an underlying basis and 30% on a reported basis to £6.1bn thanks to its Mead Johnson acquisition.

Adjusted operating profits bumped up 29% during the period to £1.4bn, but over the long term there is good potential for increases to already impressive 23.6% underlying operating margins as the Mead Johnson purchase is integrated. And as this big acquisition is bedded in, I believe dividends should naturally rise as the group deleverages, freeing up cash to be returned to shareholders.

With an impressive array of big brand names, global reach and a management team that has proven very capable of successfully executing acquisitions improving profitability, I reckon Reckit Benckiser could be an ideal long-term holding for conservative, income-focused investors.

Five time tested defensive giants

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.