Buying and holding dividend-paying shares can be an effective way to generate a second income. Or dividends can be reinvested with the aim of building the value of a portfolio over time. And then it may be capable of paying a larger second income later — perhaps in retirement, for example.
However, it’s a good idea to diversify stock investments between several positions. And it’s wise to select stocks from different industries in case one sector suffers difficulties.
One example of the risks of weighting too much into one sector occurred last year when retail and consumer-facing stocks took an outsized pummelling. So spreading investments between different sectors can work to mitigate some of the risks that come with stocks.
Well-established businesses
And for dividend-led investments, it can be better to stick with well-established and larger businesses. Indeed, companies with small market capitalisations can suffer from rapid share price movements and volatility.
On top of all that, before buying any stock it’s necessary to research the underlying business. And one thing worth looking for is a consistent multi-year record of shareholder dividend payments.
It takes a robust business to pay dividends. And if those shareholder payments tend to rise a little each year, all the better. And in cases like that, there’s often a good chance of finding a business generating stable and growing cash flow. After all, it takes cash to pay dividends.
Having considered all these things, I’ve found three attractive income shares to add to a dividend portfolio now. And by that I mean they are good candidates for further research with a view to buying for the long term.
But even attractive-looking businesses can suffer operational setbacks from time to time, perhaps even causing an investor to lose money.
Three stocks to consider
Nevertheless, I like the look of IG Group, the trading platform provider and financial technology company. With the share price near 800p, the market capitalisation is around £3.3bn. And that all-important forward-looking dividend yield is near 5.9% for the trading year to May 2024. The compound annual growth rate (CAGR) of the dividend is running near 6.5%.
But I’m also keen on Keller, the geotechnical specialist groundworks contractor. With its share price around 798p, the market capitalisation is about £585m. And the forward-looking dividend yield is about 5% for 2023. Meanwhile, the CAGR for the dividend is just below 5%.
The third stock of interest is Hargreaves Lansdown, the digital wealth management service administering company. With the share price around 846p, the market capitalisation is £4.1bn. And the anticipated dividend yield for the trading year to June 2024 is around 5.5%.
Just like the other companies mentioned, the dividend has been growing and the CAGR is hitting about 6.5%.
Three stocks isn’t enough for a well-balanced and diversified portfolio. But I reckon these three are good jumping-off points for making a start with research. And although nothing is certain, they have the potential to serve investors well over time.
