Dividend shares allow investors to earn a passive income just by owning them. There’s no leg work involved. It’s one of the simplest ways to create an addition revenue stream.
Amid the recent turmoil, and concerns about inflation, interest rates, and slowing economic growth, stocks have been pushed downwards.
While this may seem like a bad time to invest, it could be an exceptional opportunity. As investors we want to buy when stocks are low and when yields are high.
It’s my personal belief that the broad direction of the market is upwards. The “extreme pessimism” impacting UK stocks — not my words — surely won’t last forever. Whether it takes some positive data or a change of government, I’m not sure, but I’m confident it will happen.
Buying for passive income
Dividend stocks are shares of publicly traded companies that distribute a portion of their profits or earnings to shareholders in the form of dividends. Dividends are typically paid out on a regular basis, such as quarterly or annually, thus providing a source of passive income.
Dividend-paying companies are often well-established and financially stable, indicating a level of confidence in the company’s future prospects. But this doesn’t mean that dividends are by any means guaranteed. A payment can be cut or cancelled at anytime.
Currently, there are some 70 stocks on the FTSE 350 offering yields in excess of 6%. That’s a really significant reflection on the state of the market. Because when share prices fall, dividend yields go up. In most sectors, we’ve seen cash flows remain strong despite the market pushing downwards.
However, this doesn’t mean we should let our guard down. Sometimes big dividends are a warning sign. We can assess whether a yield is sustainable by looking at the dividend coverage ratio, projected cash flows, and the broader economic climate.
Locking in high yields
The dividend yield an investor receives is always linked to the price they paid for the stock. Even in the share price doubles the next day, assuming the dividend payment remains the same, the yield received by the investor will not be impacted.
This is why the current market offers such opportunity. I cannot remember in my lifetime a period when so many stocks were offering such sizeable dividend yields. As a passive income investor with cash on hand, I’d be looking to spread by investments across a range of blue-chip and mid-cap dividend payers.
Some of my top picks include:
| Dividend yield | |
| Centamin | 4.6% |
| Epwin Group | 6.3% |
| Hargreaves Lansdown | 5% |
| Legal & General Group | 8.6% |
| Lloyds | 5.4% |
| NextEnergy Solar Fund | 8.3% |
A £10,000 investment spread among these stocks could provide me with an annual dividend return of around £650. That’s pretty strong. I’d also expect to see firms like Lloyds commit to increasing their dividend payments in the coming years. In 2022, Lloyds’ dividend was covered 3.25 times — making it one of the strongest on the FTSE 100.
