It’s an excellent time to own dividend shares right now, in my opinion. If I had £20,000 to add to a new Stocks and Shares ISA, that’s where my focus would be.
It hasn’t always been the case though. There was a time when my focus was very much on growth shares. But times change. The economic environment has shifted and I reckon dividend shares could be the big winners of 2023.
Why dividend shares?
There are a number of reasons why I like dividend-paying shares right now. First, these companies tend to be profitable. If they weren’t, they typically wouldn’t be able to afford to give cash payments to shareholders.
Second, they’re usually mature and established businesses. The most reliable dividends can be had from those that have been paying out for many years.
Next, if I pick the best ones, I think I can achieve an average 7% dividend yield. The average FTSE 100 yield is currently 3.6%. But when looking for dividend shares, I prefer to look in my sweet spot range of 6% to 10%.
And finally, I’m expecting the recession to deepen next year. If my assessment is right, dividends could help to form a chunk of my returns in 2023.
2023 Stocks and Shares ISA
If I invest £20,000 and target a 7% yield, this is how I’d structure my Stocks and Shares ISA.
As I prefer to reduce my risk, I’d diversify and split my money across several top picks. In this instance, I’d choose five of the best dividend shares that I could find.
That way if something goes wrong with one of the companies, I could potentially fall back on the others.
I also wouldn’t want to be exposed to just one industry. Ideally, my top five would all belong to different sectors.
That way I wouldn’t be putting all my eggs in one basket.
Due diligence
In addition to yield, I’d look at a company’s dividend history. Ideally, I’d like to own companies that have consistently been paying out for at least five years.
Next, it would be time to do some more due diligence. When researching companies, I look to see if they have a sustainable competitive advantage.
Popular investor Warren Buffett famously refers to this as a ‘moat’. It could be in the form of a strong brand, patent or superior technology, for instance.
I’m also keen on companies that operate with a solid balance sheet. Low or manageable debt is preferred.
Bear in mind that dividends aren’t guaranteed. They can be cut if the outlook for earnings becomes uncertain or if payouts become unaffordable.
Which shares?
Overall, when I look at shares available today, my criteria results in just a handful of names.
If I had an extra £20,000 for dividend shares, I’d buy Phoenix Group, Legal and General, Rio Tinto, British American Tobacco and Land Securities Group.
On average this selection of five offers a 7.3% yield, and has demonstrated 22 years of consecutive payments. In buying this group, I’d be getting a diversified selection of high-quality and high-yielding shares.
And over time, I’d also expect the value of these businesses to rise. But as I’m mainly targeting passive income, that would be a welcome bonus.
