Buying dividend shares and simply reinvesting the income stream can be a great long-term investment strategy. But I think it works best if focused on businesses with a high degree of stability in their operations.
And that steers me towards the defensives. In other words, companies operating in sectors that aren’t buffeted about too much by changing macro-economic conditions.
The alternative would be to go for cyclical enterprises, such as miners, retailers, banks and others. But the rewards over the long term could prove to be patchy. Cyclical outfits are infamous for their roller-coaster ride regarding earnings, dividends and share prices.
At the top of my list of attractive defensive dividend-payers is smoking products maker British American Tobacco. And I also like its competitor Imperial Brands. Both companies are working on promoting less-harmful products such as those for vaping.
However, the sector is shunned on ethical concerns by many investors. And smoking volumes are in long-term decline. These two stocks aren’t for everyone despite their tasty numbers and chunky dividend yields.
But I’ve got other defensive dividend stocks in my sights as well, such as trading platform provider IG Group. With the share price near 794p, the forward-looking yield is near 6.5% for the trading year to May 2024. And the firm’s multi-year dividend record is remarkably steady. I think that speaks volumes about the defensive credentials of the business. Indeed, speculation is as old as the hills and won’t go away any time soon. IG helps to facilitate that.
I’d also target the renewable energy sector with investments in SSE and Foresight Solar Fund. Given what a hot topic energy has been for the past few years, I can hardly believe my luck that both are yielding as high as 5%. And in the case of Foresight, considerably more!
However, they aren’t the only dividend shares I’d buy. Supermarket chain J Sainsbury tempts me with its forward-looking yield above 5%. The mainstream supermarkets have been engaged in a battle with market-share-grabbing discounters such as Aldi and Lidl. But I reckon Sainsbury’s is capable of grinding on far into the future, churning out that stream of dividends.
Meanwhile, right now I’m very bullish about the prospects for the economy and for those cyclical outfits that have been clobbered in the recent bear market. So, I’d cheat with my strategy and buy some cyclical dividend-payers for a medium-term holding period. For example, I like the look of housebuilders Vistry and Taylor Wimpey. And I’d go for gifting and engagement company Appreciate.
Finally, I’d load up with shares in Lloyds Banking Group and price-comparison company Moneysupermarket.com. In both cases, the chunky dividend looks safe to me for the foreseeable future.
A profitable long-term investment outcome isn’t certain despite my fondness for these companies now. All shares come with risks as well as positive potential. Nevertheless, I think I’m seeing good value and attractive forward prospects with these businesses. So I’m inclined to fill my boots!