Stock investing: how I’d find the best dividend shares to buy now

Buying dividend shares with high yields and passive income growth potential could be a sound move. Here’s how I’d go about finding them.

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.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Buying dividend shares to make a passive income has long been a large part of stock investing. After all, the yields available in indexes such as the FTSE 100 have often been higher than the income returns available from other income-producing assets.

Determining the best dividend stocks to buy now is a very subjective task. However, many investors may be searching for a mix of high yields, dividend reliability and the potential for a rise in shareholder payouts.

By focusing on undervalued shares with long-term recovery potential, it may be possible to find such companies at the present time.

Buying undervalued dividend shares

Dividend shares could be undervalued for a wide range of reasons. For example, investors may be underestimating their capacity to overcome present economic woes. As such, provided they have maintained their shareholder payouts in recent months and their dividends are affordable, they may offer investment appeal on a long-term basis.

For example, retailers, resources companies and financial services businesses currently trade on low valuations in many cases. Their performances have generally been negatively impacted by an economic slowdown.

However, their financial positions could be sufficient to maintain, or even grow, their dividends even in a challenging economic period. And, since they trade at low prices in some cases, they may offer relatively high yields compared to other dividend shares.

Identifying dividend growth opportunities

One of the challenges when buying dividend shares is obtaining growth potential at a reasonable price. In other words, companies that are expected to produce improving levels of profitability may have high share prices that compress their dividend yields. This may make them unappealing to income investors.

As such, buying UK shares that have the potential to benefit the most from a recovery could be a sound move. The world economy isn’t guaranteed to grow. Nor is any company guaranteed to pay a rising dividend. But GDP growth is widely forecast to increase as the pandemic reduces in size and scale.

This may provide recovery opportunities for many businesses that have experienced tough operating conditions. This may lead them to afford a larger shareholder payout that could increase their appeal versus other dividend shares.

Building a diverse portfolio

There are always risks in buying dividend shares to make a passive income. As such, it’s imperative to diversify among a broad range of businesses instead of relying on a small number of companies for a passive income.

Through focusing on undervalued stocks and sectors that could benefit the most from a likely economic recovery, it may be possible to obtain a high and growing passive income.

Many companies remain unpopular among investors right now. So, there could be opportunities to capitalise on high, affordable yields across the FTSE 100 and FTSE 250.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s how I’d target £496k in FTSE 100 shares and £19k of passive income in a Stocks & Shares ISA

I invest as much surplus cash as I can at the end of the month in my Stocks and Shares…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »