What’s the best strategy for investors to cope with our dire economic outlook for 2023? For me, it’s a combination of investing for the long term, and focusing on dividend shares.
Starting today, these three dividend shares would definitely make it on to my shortlist. In fact, not starting today, I already own them.
Investment trust
I love investment trusts. They give me a great way to spread my money over a chosen strategy, with some very useful diversification.
City of London Investment Trust (LSE: CTY) is one of my favourites, which I bought for long-term income. Admittedly, the share price hasn’t done much over the past few years.
But we have a cracking dividend record to make up for it. City of London currently offers a dividend yield of 5.2%.
But, more importantly, it’s raised its annual dividend for 56 years in a row. Part of that comes from an investment trust’s ability to retain some cash during strong years to support its dividends in weaker times.
There’s a risk that rises over the next few years might be small, effectively losing money against inflation. But I could live with that over the short term.
Housing dividends
My next choice has seen its share price fall 50% in the past 12 months. I’m talking about housebuilder Persimmon (LSE: PSN), as investors fear a housing crunch.
But Persimmon has been paying me fat dividends for some time now. I’ve had strong ordinary dividends, plus a tasty extra from special dividends as the company has been returning surplus capital. Forecasts put this year’s total dividend on a massive 18% yield.
Oh, and the market sell-off has pushed the Persimmon price-to-earnings (P/E) ratio down to just five.
The risk is perhaps obvious, that soaring interest rates could harm the property market. And that juicy dividend might need to be cut. But I see those as short-term worries. And even a 50% dividend cut would still leave a 9% yield on the current share price.
Bank cash
My third big hold for 2023 is Lloyds Banking Group (LSE: LLOY). Lloyds is on the other side of the equation, and should benefit from rising interest rates. Lending margins can be quite a bit healthier when base rates are high compared to down at 0.5%.
Lloyds is the UK’s biggest residential mortgage lender, so increasing mortgage rates should help too. This is likely to be offset by lower lending volumes. But that could take a while to work through. And over the next few years, I don’t see a great threat to the Lloyds dividend.
The share price remains depressed, keeping the forecast P/E down as low as 6.2.
That pushes the 2023 forecast dividend yield up to nearly 6.5%. And analysts have it rising further, to 7%, by 2024. Forecasts are uncertain at the best of times, and I do treat those with caution.
But Lloyds’ liquidity and cash flow look healthy enough to me. And I’m optimistic over long-term dividend prospects.
