What’s the best way to secure a second income for life? I buy UK dividend stocks, and I reinvest all the income. That way, I hope to build a nice portfolio to provide a cash stream when I retire.
And the latest news makes me think 2023 could be a great time to buy dividend stocks.
Dividend forecasts have been pared back a bit. But the latest research from investing firm AJ Bell, suggests the year could still be one of the best.
Big cash payouts
In fact, forecasts have it as the third-best year of all time for cash returns from FTSE 100 shares.
Add up all the predicted ordinary dividends, and the share buybacks already announced, and we get a massive £120bn cash pile.
That’s good news for long-term investors.
We’re feeling financial pain in 2023, with high inflation and interest rates. But if UK companies have so much cash to hand out, I’d say the future looks just fine.
How to get some
So where’s the cash coming from, and which shares should we buy?
This is all based on forecasts. And forecasts can vary in accuracy, a lot. They’re often based on companies’ own guidance, and some firms are very open and accurate with that.
Others, though, can be a little… shall we say, imaginative. And some will delay downgrading their outlook for, well, longer than I’d say is ideal. On the whole, though, when forecasts indicate the third-best year ever, I’d say there’s a good bit of wiggle room there for safety.
Best sectors
It might seem strange, but analysts expect the biggest gains in earnings and dividends to come from the financial sector.
That’s right, the banks and insurers that are supposedly struggling. It turns out that their forecasts are pretty good. Oh, and we just heard that the banks have done well in the Bank of England’s 2022 stress tests.
Housebuilders, another sector that’s under the hammer, are still on good dividend yields. They might be a bit uncertain this year, though. But in the long term, it looks to me like another cash cow sector.
Diversification
Whatever my investing strategy, diversification will always be key. Stocks and Shares ISAs lost an average of 13% in 2019/20, but those concentrated on the hardest hit sectors suffered the most.
Thankfully, this year’s big dividend yields are spread across a healthy range of sectors.
Glencore is on a forecast yield of more than 10%, though miners and commodities firms can be cyclical.
Then the British American Tobacco yield is put at 9%, and well covered by forecast earnings. Investing firm M&G is also tipped to pay 10% this year.
Income portfolio
If we add a bank, one of the top insurers, and a housebuilder, we already have a six-stock diversification. And I’d say that’s well on the way to a good long-term passive income portfolio.
These individual stocks all carry their own risks, though. So long-term investors do need to do their research properly before they buy.
