3 of the safest dividend stocks on Earth

Bigger isn’t always better when it comes to dividend stocks. Our writer considers three of the safest and most reliable top picks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Woman using laptop and working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Dividend stocks are an excellent way to earn passive income, in my opinion. But given the stock market turbulence right now I’m look for the safest variety.

But what makes one income stock safer than another? There is a list of criteria that I’d follow to find the best dividend shares.

The list

First, I’d look for shares that offer an above-average dividend yield. The current average yield for FTSE 100 firms is around 4%. So I’d be aiming for something greater.

Next, I’d want to see affordable dividends. I don’t want to buy shares in companies that might cut their dividends any time soon. It can happen, especially if the business is uncertain about its future earnings.

As dividends are typically paid from earnings, I’d look for a dividend cover greater than one. Dividend cover is measure of affordability and it looks at how well a company’s dividend is covered by current earnings.

One factor that provides some comfort is how long a business has been paying dividends to shareholders. Ideally, the best dividend stocks will have a long history of distributing consecutive payments. Some established shares have a dividend record spanning multiple decades.

I’d consider that to be safer than a business that switches its dividends on and off like a light switch.

Lastly, I’d look for rock-solid balance sheets. I want my selection of dividend stocks to survive over many years. To do so, I reckon it needs to have low levels of debt and high levels of cash flow.

Which dividend stocks?

So let’s look at which income stocks meet my criteria right now. First, I’d consider energy giant BP (LSE:BP). With a forecast dividend yield of 4.5%, it’s one of the lowest-yielding stocks in my list.

That said, I also think it’s the safest. That’s because it has a particularly large dividend cover of 5.9x, implying it has more than enough earnings to be able to sustain its payout.

The energy sector is in focus right now. Russia’s war in Ukraine has led to the supply of gas and oil being severely restricted. As countries seek to diversify their energy sources, shares like BP could remain in demand for the foreseeable future.

Bear in mind that there are some risks of higher taxes on excess profits. That said, with the new UK Prime Minister in place, I think that is now less likely.

Also, if the world enters a deeper recession, lower oil prices are possible. In this scenario, BP’s earnings and cashflow could suffer.

One factor that gives me some comfort is that BP has a long history of paying dividends. In fact, it has been making regular payments for over 30 years. This level of reliability makes BP one of the safest dividend shares that I would buy right now.

Similarly, I’d also consider iron-ore miner Rio Tinto, which offers a whopping 12% yield and a rock-solid balance sheet. I’d also look at Phoenix Group Holdings. This pensions business is on an 8% dividend yield. I particularly like that it has 13 years of history. Six of these years even experienced back-to-back dividend growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harshil Patel has positions in BP. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »