Dividend stocks can be a great source of income, especially when looking to hold for the long term. As a general rule, I also only buy stocks if I’m willing to hold them for at least five years. But before I park my money for the long term, I like to see a decent dividend yield. The average dividend yield in the FTSE 100 is around 3.5%, and ideally, I like companies with 5%+.
Nonetheless, when a dividend yield is too high, it can also mean that it’s unsustainable. For example, sometimes the dividend is not covered by earnings, and the company must issue debt to pay it. This is a very bad sign. Furthermore, it can also mean that there is no money left to invest in the company. This can lead to negative or no growth, and the share price may fall as a result. With this in mind, these are the two dividend stocks that I’d buy and hold for at least the next five years.
Housebuilding stocks have recovered well since crashing last year. This has been buoyed by rising house prices and strong demand. Persimmon (LSE: PSN) is no exception. In fact, the York-headquartered housebuilder has seen its share price rise 68% since its lows last year. The shares are also accompanied by a dividend yield of 8.5%.
There are a couple of reasons why I think Persimmon is a good dividend stock. Firstly, the housebuilder is in an excellent financial position. It has cash of £1.3bn, while its liabilities only total £1.1bn. This means that there is plenty of money to return to shareholders, without jeopardising the company’s financial position. Secondly, it seems well-covered by profits. This is because the group generated half-year profits of £480m, while the dividends paid in the same period totalled under £398m. Hopefully, this means that the dividend yield can stay at similar levels.
My only issue with Persimmon is that house prices may fall over the next year, after rising so considerably recently. This would damage profits, and potentially also the dividend. Even so, I’d still buy and hold Persimmon for the next five years, because the UK’s housing shortage looks set to keep demand high.
A 7% yield dividend stock
Legal & General (LSE: LGEN) is by far my favourite dividend stock to buy. In fact, the insurance company has seen a constantly rising dividend, which has accompanied growing profits and the rising share price. Even so, the Legal & General share price is still 10% lower than its pre-pandemic level, even though its operating profits are higher than in 2019.
These high profits also mean that the dividend seems extremely sustainable. In fact, in the first half of this year, operating profits totalled over £1bn. The full-year dividend only costs around £1.1bn, meaning that provided profits stay healthy for the rest of the year, there will be plenty of money left over to invest in the company. Accordingly, alongside the dividend, I feel that there is significant upside potential in the share price.
As such, I’m happy to disregard the risk of the UK economy slowing down and buy this insurance company today. It currently makes up the largest part of my portfolio, and I’m looking to hold it for at least the next five years.
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Stuart Blair owns shares in Legal & General. The Motley Fool UK has no position in any of the shares mentioned. 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.