Focusing on shareholder dividends seems like a decent way to approach the process of investing in stocks. Regular equity income is in your hands without having to wait for growth driven by advances in the underlying business.
And I can use the dividends to spend or reinvest them to help increase the value of my investments.
Flexible dividend yields
As long as my portfolio is only in the build-up phase, I will always reinvest dividends. But it’s easy to change later when I need an income to live off my investments, such as in retirement.
But in any case, what’s important to me is the sustainability of the dividend stream. And that means looking for companies with stable incoming cash flow. And, for this reason, I tend to avoid companies with cyclical activities despite their often high dividend yields. The problem with cyclicals, in my opinion, is that earnings, cash flow and dividends can be present today and disappear tomorrow, depending on the general economic conditions that prevail.
My hunting ground for dividend-driven investing therefore includes sectors with more defensive companies. For example, I like industries such as pharmaceuticals and healthcare, information technology (IT), communications, technology, utilities, fast moving consumer goods, food. and others.
And right now, several of these companies are offering attractive dividend yields, such as national grid in the utilities and energy sector. In May, the company issued a positive outlook statement. And City analysts expect steady single-digit dividend growth to come. Meanwhile, with a share price close to 922p, the expected dividend yield for the year ended March 2023 is around 5.6%.
Accept risks for high return
However, National Grid carries a fairly old pile of debt. And that could become problematic if regulatory changes put the company’s cash flow under pressure in the years to come. Nonetheless, I would accept the risks and lock that return into my portfolio by buying some of the stocks.
In May, the food ingredients company Tate & Lyle (LSE: TATE) said it expects lower profits for the current fiscal year due to lower profits at its commodities division. However, directors expect adjusted operating profit to realize single-digit percentage gains after eliminating the effects of raw materials.
Meanwhile, the outlook is positive beyond the current year, and I now see any weakness in the share price as an opportunity to lock in the flow of shareholder dividends. With a stock close to 743p, the expected return for the market year through March 2023 is around 4.4%. And City analysts don’t expect the company to miss a beat with its annual dividend increase.
Of course, these analysts could be wrong and stocks could fall with the dividend. But I would take the risk of holding some of the stocks in my portfolio for the long term.
Finally, there is always a place in my portfolio for a tracker fund following the FTSE 100 index. I consider it the income index because of its often high dividend yield. Right now the yield is around 3% but it often goes higher.
However, the index can be volatile and there is a risk that I will lose money on an investment in a tracker. However, this is offset by the instant diversification I would get between many underlying stocks.
5 actions to try to create wealth after 50 years
Markets around the world are reeling from the coronavirus pandemic …
And with so many great companies trading at prices that seem like âdiscount containers,â now may be the time for savvy investors to strike potential deals.
But whether you are a new investor or a seasoned professional, deciding which stocks to add to your shopping list can be a daunting prospect during an unprecedented time.
Luckily, The Motley Fool is here to help: Our UK CIO and his team of analysts have shortlisted five companies they believe STILL offer significant long-term growth prospects despite the global foreclosure …
You see, here at The Motley Fool, we don’t think over-trading is the right path to financial freedom in retirement; instead, we advocate buying and owning (AT LEAST three to five years) at least 15 quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of these five companies in a special investment report that you can download today for FREE. If you’re 50 or older, we think these stocks could be suitable for any well-diversified portfolio, and you may want to consider taking a position in the five immediately.
Kevin Godbold has no position in any of the stocks mentioned. The Motley Fool UK recommended National Grid. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.