In addition to growth stocks, my Stocks and Shares ISA includes several dividend shares. I really like the regular income that they provide. Every few months, I’ll receive a share of their profits in the form of a dividend payment. And it’s quite nice to see that money flowing into my account.
Searching for the best
I’m always on the lookout for opportunities and right now, I can see several dirt-cheap dividend shares offering an above-average yield. Currently the average FTSE 100 yield is 3.3%. But with some homework, I reckon it’s possible to find some quality shares that offer around 6%. To illustrate that, on a £1,000 investment, that’s £60 in dividend payments.
In addition to the dividend yield, there are several other factors that I look for when tracking down the best dividend shares. Just as with a buy-to-let property, as an investor, I’d like my rental income and the value of my property to rise. Similarly with dividend shares, I’d like both my dividend income and the value of my shares to increase. So overall, I prefer to find companies that have the potential to grow both dividends and their share prices.
Reliable dividend shares
Next, I’d want to see if the expected dividends are reliable. For instance, can a company afford to consistently pay them, and what is its track record? There are no guarantees and it’s possible a company could suspend payments for a number of reasons. This happened to many businesses during the March 2020 Covid crash when plenty of companies were faced with uncertainty regarding their earnings.
That being said, I reckon it’s possible to reduce the risks and raise the chances of reliable dividends. To do so, I’d look for dividends that are covered by a company’s earnings. This is known as the dividend cover, and it measures the number of times a company can pay dividends to its shareholders. At the very least, I’d look for a reading above one.
In my opinion, a business that has paid dividends for 30 years is far more of a reliable prospect than one that has just started this year. That’s why I like my dividend shares to have some form of track record and history in paying dividends.
Dirt-cheap top picks
There seem to be dozens of stocks that meet my criteria at the moment. Three that have caught my eye in particular are Rio Tinto, Legal & General, and Vodafone. On average, the three companies have a dividend yield of 6.2%, a dividend cover ratio of 1.4, and 23 years of back-to-back payment history.
In addition, together they have a price-to-earnings ratio of just 10x. I reckon that’s ‘dirt-cheap’ for established shares with upwardly trending earnings.
If I had invested in all three picks one year ago, I’d be a happy chap right now. On average, they’ve gained 13% including dividends. I reckon that’s pretty good. So what might I expect for the year ahead? Well, I’d like to see more of the same. Although not guaranteed, it’s encouraging that city analysts expect all three to grow their earnings over the coming year. I’ll have to report back in one year to see what happened.
