With £1k to invest, I am more likely to buy dividend stocks than anything else. The reason is simple. Dividend yields are on the rise right now. Some of the highest dividend yields are actually comparable to the capital gains I could hope to see in a year. For instance, a few FTSE 100 stocks actually have double-digit yields. And I do not know about anyone else, but I think that is a decent return on my capital in a year’s time.
Active management of dividend stocks
There is a catch here, though. Great dividend yields in one year do not guarantee me sustained gains year after year. I do have a few ways to try and ensure that I continue to get such gains from dividend stocks, though. The first one is to actively manage my investments. I should regularly check to see if there are any changes to the dividend amounts across the stocks I have bought.
Right now, we are in an economic recovery phase, so I do not think that we should expect too many dramatic cuts to dividends right now. Three to four years from now, the business cycle could be in a very different place. Some of the biggest dividend yield providers, like industrial metal miners, could fall out of favour then. And this could impact their dividends as well. I might want to switch to more lucrative investing options then.
Dependable dividend yields
If, however, I am unable to actively manage my investments, I could consider two other ways to try and ensure the best possible dividend yields for myself in the long term. One of them is to consider the stocks that have consistently delivered a good dividend yield. For instance, I would look at FTSE 100 utilities. These companies have the advantage of a dependable stream of income.
That is not true for many other dividend stocks today, which could be severely impacted by slowdowns. As a result, I do not have to constantly be on top of my investments to be fairly sure that the payouts will be consistent.
Growth plus dividend stocks
Another category I like is stocks that offer dividend growth. Typically such companies would also be ones that are growing fast, which is why they are able to offer bigger dividends over time. This also means that such stocks are likely to see an increase in share prices. Because who does not want to buy a share whose performance is improving?
As a result, their dividend yields at a single point in time might be underwhelming. The dividend yield is dividends as a percentage of share price. If share price rises faster than dividends do, then there is no way the stock’s yield can improve. However, over a period of time, the yield on my initial investment can look very good by virtue of all the dividend growth. So I can hold these stocks for a long time for superior capital gains as well as good dividends.
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Manika Premsingh has no position in any of the shares mentioned. 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.