Focusing on shareholder dividends strikes me as a decent way to approach the process of investing in stocks. Regular income from shares is in the hand without having to wait for growth driven by advances in the underlying business.
And I can take the dividends to spend or reinvest them to help compound the value of my investments.
Flexible dividend returns
While my portfolio remains in the building stage, I’ll always reinvest dividends. But it’s easy to switch later when I may need income to live on from my investments, such as in retirement.
But either way, what’s important to me is the sustainability of the dividend stream. And that means looking for businesses with stable incoming flows of cash. And, for that reason, I tend to avoid businesses with cyclical activities despite their often high dividend yields. The problem with the cyclicals, as I see it, is earnings, cash flow and dividends can be here today and gone tomorrow, depending on the prevailing general economic conditions.
So my hunting ground for dividend-led investments includes sectors with more defensive businesses. For example, I like industries such as pharmaceuticals & healthcare, information technology (IT), communications, technology, utilities, fast-moving consumer goods, food and others.
And right now, several such companies offer 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 percentage growth in the dividend ahead. Meanwhile, with the share price near 922p, the forward-looking dividend yield for the trading year to March 2023 is around 5.6%.
Embracing the risks for a high yield
However, National Grid carries a fair old pile of debt. And that could become problematic if regulatory changes put the company’s cash flow under pressure in the years ahead. Nevertheless, I’d embrace the risks and lock that yield into my portfolio by buying some of the shares.
In May, food ingredients company Tate & Lyle (LSE: TATE) said it expects lower profits in the current trading year because of reduced earnings from its Commodities division. However, the directors expect adjusted operating profit to make single-digit percentage gains after stripping out the effects of commodities.
Meanwhile, the outlook is positive beyond the current year, and I see any weakness in the share price now as an opportunity to lock in the shareholder dividend stream. With the stock near 743p, the forward-looking yield for the trading year to March 2023 is around 4.4%. And City analysts don’t expect the company to miss a beat with its annual incremental dividend raising.
Of course, those analysts could be wrong and the shares may fall along with the dividend. But I’d take the risk of owning some of the shares in my long-term portfolio.
Finally, there’s always a place in my portfolio for a tracker fund following the FTSE 100 index. I see it as the income index because of its often high dividend yield. Right now, the yield is running near 3% but it often goes higher.
However, the index can be volatile and there’s a risk I could lose money on a tracker investment. However, that’s counterbalanced by the instant diversification I’d get between many underlying stocks.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended National Grid. 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.