Down 36%! Why is this recovering dividend stock in my second income portfolio?

It seems everyone’s constantly pitching me the latest scheme for generating a second income. Whether it’s affiliate marketing, online courses or buying vending machines (seriously?). While some of these ideas sound promising, I just don’t have the time to dedicate to them.

Instead, I maintain my belief that the most effortless way to create a second income stream is by purchasing dividend stocks in an ISA. Sure, it takes a bit of time to grow into something substantial, but it demands far less effort than the alternatives.

For investors, a Stocks and Shares ISA helps achieve optimal returns by reducing tax liabilities. UK residents can invest up to £20,000 annually into the ISA with any profits remaining completely free from taxes.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

There are plenty of choices when it comes to ISAs, so it’s recommended that investors take the time to explore their options and find the one that aligns best with their personal financial goals.

What to look for in dividend shares 

A good dividend stock is one from a company with a reliable history of making regular payments. A flashy 10% yield means nothing if the payments don’t materialise! And trust me, when things get tough and profits dip, dividends are usually the first thing to get slashed.

To earn a worthwhile income, I think a dividend portfolio should have an average yield of around 6%. Yields typically range from 1% to 10%, but don’t be fooled — the highest yield doesn’t always equate to the best investment.

Here’s why I think this dividend stock makes a great addition to my portfolio.

An undervalued stock with growth potential

The British multinational consumer goods company Reckitt Benckiser (LSE: RKT) produces a wide range of health, hygiene, and nutrition products. Its key brands include household names such as Lysol, Dettol, and Enfamil. 

Earlier this year, a baby formula-linked lawsuit led to significant financial and reputational damage that hurt its share price. The issues appear to be resolved but any further lawsuits could hurt the share price again. For now, it’s recovered well and is up 16% in the past six months, but remains down 36% from its all-time high.

As a well-established brand with a history of strategic acquisitions, the £33bn company also has significant intangible assets like goodwill intellectual property. However, it carries a substantial debt burden, with total liabilities amounting to £18.3bn and net debt of £8.1bn. Naturally, this is a risk that investors should consider.

A recent Q3 trading update revealed it’s on track to meet its full-year revenue and profit targets. It faced some challenges in its Nutrition segment this year due to the Mount Vernon tornado. Still, both the Health and Hygiene sectors reported strong performance, helping balance its overall growth strategy. The company’s CEO, Kris Licht, highlighted progress in reshaping its operations for efficiency and shareholder returns, focusing on a simplified business model​.

Dividend-wise, its yield is a modest 4% but based on its history, I expect this will increase. Payments have been reliable and growing at a rate of 5.62% for the past 15 years. Plus, the average 12-month price target is £54.18 — a 10% increase — so that could add to the returns.