Buying dividend shares is an investing strategy that can provide a regular income stream. Some (but not all) companies pay dividends to shareholders. These are often distributed on a quarterly basis.
Dividend shares provide regular cash, regardless of how the share price is performing. That’s why I own several of these in my Stocks and Shares ISA.
Top dividend shares
One such share that I bought is British American Tobacco (LSE:BATS). It currently offers a 6.4% dividend yield. That’s by no means the largest available in the FTSE 100, but it’s still above average.
As I was looking for lifelong passive income, I was particularly interested in shares that demonstrated a long dividend history. British American Tobacco (BAT) is one stock that stood out with almost three decades of back-to-back payments.
I was also looking for a defensive stocks to diversify my portfolio. I think it’s important to own a balance of different types. For instance, I own growth, value and income shares.
Each have their own characteristics, and some often overlap the various buckets. I’d say BAT could be classed as both a value and income share.
Higher profits
Bear in mind that changing attitudes to smoking could still affect its earnings in the long run, so it will definitely be a factor to watch.
One point to note is that it’s highly cash-generative. Despite slowing sales in developed markets, BAT’s profits have moved higher. That’s partly due to its ability to raise prices to offset falling sales.
Its dividend is nicely covered by earnings, and overall, I think it’s one of the most reliable income shares I could find.
Reliable dividend-payer
Another income share that I bought was oil giant BP (LSE:BP.). With a 4% dividend yield, it’s around the average FTSE 100 level. But there’s more to dividend stocks than just their yield.
I’d much rather own a reliable dividend-payer that has the potential to raise its payments. I reckon BP fits into this category. Like BAT, it has consistently been paying dividends for several decades.
When looking for the best dividend shares, I use a metric called dividend cover. This shows how affordable payments are in relation to earnings.
With cover of 6.4 times, BP can more than comfortably afford its current level of payments. In fact, I reckon it could even raise its dividend over the coming year.
Combined with continued share buybacks, that could put even more money in my pocket.
The big transition
But like tobacco, isn’t oil a dying industry too? Perhaps eventually, but that’s why BP is focused on transitioning to lower-carbon energy.
This will take time and it’s uncertain what kind of business BP will be like in the future.
I’m also keeping a keen eye on oil prices. If they stay too high for too long, it could result in a faster shift towards oil alternatives, like heat pumps for example.
Overall BP, much like many of its peers appears to be in something of a sweet spot right now.
Elevated oil prices and constrained supply are helping to create a mountain of surplus cash flow. That’s allowing it to reduce debt and become a far more resilient business.
