This year has not been a good one for income investors. Many of the best UK dividend shares have been forced to cut their payouts. Things may be starting to look up, however. With Covid-19 vaccines already rolling out and the ban on banking dividends no longer in place, now may be the perfect time to invest for income.
With this in mind, here are my personal criteria for picking the best UK dividend shares right now.
Watch your capital
My first rule when looking for UK dividend shares, is making every effort to keep my initial investment secure. This means that while income is my main consideration, I also want steady growth in the price as well.
In the UK, this effectively means I limit myself to the FTSE 100 when looking for income. I choose among the largest, most stable firms with strong brands, in industries I think are growing or at least around for the long run.
On the company side, I want a history of strong fundamentals in its finances. This means year-on-year revenue and profit growth, and depending on the sector, not too much debt.
Dividend yield
My next criteria is the most obvious – dividend yield. In the UK, a dividend is paid on a pence-per-share basis. This means the yield is very much dependent on the share price itself. While in more stable times I consider the 3%–6% range a sensible one to look at, in today’s market I think we can do better.
Just as with looking for growth, there are often bargains to be had. A company’s share price can drop because of a news story or trend that actually won’t have much genuine impact on its fundamentals. These are the time to ‘lock in’ good yields.
Of course knowing the difference between these short-term sell-offs and fundamental problems is often the difficult part. Here good advice and a dose of healthy scepticism can be useful.
Dividend growth
My last criteria for choosing UK dividend shares is looking for dividend growth. As dividends are paid on a pence per share basis, I would want to see the dividend payout itself increasing year on year. Something like 2% annual growth is enough to keep up with inflation at the very least. Preferably, dividend increasing as profits increased as well indicates the value the company has for its shareholders.
Very much linked with this is consistency in the dividend schedule. Aside from the practicalities of being able to rely on regular payments, it is a strong indicator of a company’s ability to consistently offer the dividends I am looking for.
The best UK dividend shares will show a pattern of usually four payouts, once a quarter, usually in the same months each year. This regularity can be a good indicator of the company’s ability to pay going forward. If it has never had to worry about finding cash for dividends, it hopefully will have little trouble doing so in future.
