With interest rates being relatively low at the present time, obtaining an income from dividend shares is likely to be an attractive option for many investors.
One factor which may be holding you back when considering the purchase of dividend shares is their risk. The prices of dividend shares can decline. Meanwhile, their dividend payments may be erratic, and can even fall if trading conditions worsen.
With that in mind, here’s how you can reduce the risks involved when buying dividend shares. In doing so, you could obtain a robust regular income from your portfolio of stocks.
Geographic diversity
While the world has become increasingly globalised, and countries are economically interdependent, diversifying across different geographies is still a worthwhile move for all investors. It means that the impact of localised economic challenges, such as a slowdown in a specific economy, could be offset by strong growth elsewhere.
The advancement of online sharedealing in recent years means that it is easier than ever to buy stocks which are listed in different countries. Many sharedealing providers, for example, charge a modest amount for buying international stocks. This could be a price worth paying for the positive impact they may have on the risk profile of your portfolio.
Defensive sectors
As well as diversifying geographically, buying shares in different industries and sectors could improve the resilience of your dividend income stream. Should companies in one industry, for example, experience challenging trading conditions, this may be compensated for by growth in another industry. This could not only improve the reliability of your overall dividends, but enable you to gain exposure to a wider range of industries which could boost the growth rate of your dividend income.
Of course, it may be prudent to focus your capital on industries which have historically offered defensive characteristics. They may be better placed to deliver dividend growth during challenging periods for the world economy. With global equities having come under pressure in recent months due to the potential threat from the spread of coronavirus, defensive stocks may also become increasingly popular among investors and could, therefore, deliver capital growth alongside their robust dividends.
A range of stocks
Having a relatively large number of companies within your portfolio may also create a more resilient income stream. Holding a wide range of companies means you are less dependent on a specific stock for your income, which could significantly reduce your overall risk should one or more of your holdings decide to cut their dividend payments at some point in future.
Since the cost of buying shares has fallen considerably over the past decade, it is cheaper than ever to build a diverse portfolio of companies. Therefore, obtaining a robust regular income from your capital through purchasing dividend stocks is a realistic goal for almost any investor who has a long-term time horizon.
