There are plenty of strategies for investing £5,000 in dividend shares. A simple high-yield portfolio is one. The idea is to pick the headline big yields from a variety of sectors, and just hold.
Right now, that might mean putting £1,000 into each of Persimmon (forecast 18%), M&G (9.9%), Rio Tinto (9.4%), Vodafone (8.7%) and Phoenix Group Holdings (8.3%). I suspect all of those will do well over the long term, but they all face risks too.
Sometimes a dividend yield is high simply because the share price has fallen, and that might be for good reason. Rio Tinto has already cut its interim dividend this year, as commodities demand has been declining. And financial stocks could be in for a tough couple of years.
I prefer to add another criterion to my dividend stock choices. I like to see decent cover by earnings, as that can provide a degree of safety.
Cover
I might go for Imperial Brands. It still has a 6.7% forecast dividend yield. But it should also be covered around 1.6 times by earnings. It has relatively good visibility of earnings too. And I see it as reasonably recession-resistant. Of course, there are longer-term risks associated with tobacco.
Legal & General also appeals, with its 7.4% yield. The sector could definitely face some recession pressure. But at the moment, forecasts suggest dividend cover of close to 1.8 times. I think that reduces the chance of a cut.
Checking other headline big yielders shows some very thin cover. We’re looking at bare cover of 1 times at Vodafone. And Persimmon’s headline yield includes a weakly-covered special, which won’t be maintained.
Reliability
So that’s a good yield and decent cover by earnings dealt with. I also look for long-term reliability. At the moment, I don’t mind too much if my dividend income is erratic as I reinvest it anyway. But when I need to start taking the income, something consistent would be better.
That’s why I might go for Unilever. It has a relatively modest yield at around 3.6%. But it boasts a long-term record of reliability, and strong cover by earnings. The share price has been a bit volatile of late, getting into what looked like a pandemic panic bubble. But over 10 years it’s up 75%, which makes a good total return.
If a consistent dividend is good, a progressive one can be even better. And that’s where investment trusts come in. City of London Investment Trust, for example, offers a yield of close to 5%. And it’s lifted the dividend every year for the past 56 years. Murray Income Trust is expected to yield 4.5%, and has raised its dividend for 49 years in a row.
Verdict
I haven’t properly covered the risks associated with any of these (which they all have), and I’m not making recommendations. Before I invested in any, I’d research them properly.
But these are the characteristics I look for in dividend investments. And my £5,000 would be split between five stocks selected using these criteria.
