The Motley Fool

How I’d determine the best types of dividend stocks to buy in 2021

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Buying dividend stocks to make a passive income could become increasingly popular in 2021. After all, the income returns of other assets, such as cash and bonds, are likely to remain disappointing due to low interest rates. Meanwhile, high property prices may restrict their capacity to provide a generous passive income for buy-to-let investors.

Of course, determining what are the best types of dividend shares to buy could be a challenge due to uncertain economic conditions. However, by focusing on competitive advantages, dividend affordability and defensive characteristics, it may be possible to unearth the most attractive income shares for the long run.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Dividend stocks with competitive advantages

Given the uncertain economic outlook, buying dividend stocks that have significant competitive advantages could be a shrewd move. They may be more likely to deliver relatively strong sales and profit during a challenging period for their sector. For example, they may have strong customer loyalty or unique products. And that may allow them to maintain higher margins than their competitors.

Businesses with significant competitive advantages may also be able to grab market share from weaker sector peers. This may lead to an improving financial performance in the long run. And that could produce a more resilient, and growing, dividend over the coming years.

Defensive characteristics

Dividend stocks with defensive characteristics may provide a more robust income return in 2021. At present, it remains unclear how factors such as the coronavirus vaccine will play out. This could mean there’s a further period of lockdown measures. And that could lead to a poor financial performance from companies closely correlated to the prospects for the economy.

As such, buying defensive shares may provide greater security during what could prove to be a challenging year for many industries. In some cases, it’s also possible to achieve a high yield from defensive shares. They haven’t been popular among investors in recent months because of an increasing focus on growth stocks that are often cyclical in nature. This may provide scope for a higher income return in the coming months.

A low payout ratio

Due to the potential for reduced sales and profitability in the current year, buying dividend stocks that have low payout ratios could be a sound move. A company’s dividend payout ratio can be calculated by dividing its dividend by net profit to give a percentage figure. A payout ratio of less than 100% shows it had headroom when making its most recent dividend payment.

At present, it may be prudent to seek companies with a payout ratio of significantly less than 100%. Otherwise, there may be a risk of a dividend cut should their financial performance deteriorate in the short run. Conversely, low payout ratios could mean impressive dividend growth in the coming years that boosts an investor’s passive income.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.