As an investor, diversification is a key risk management tool. So although I reckon some dividend shares are better than others, I do not just put all of my money into what I think is my best idea, in case events turn out to prove me wrong.
Having said that, I think it can help focus the mind to consider what I would do if I wanted to invest in only dividend share in the coming month.
For example, although I recently bought Vodafone, its debt level means I still see a risk of a dividend cut at some point. So if I had spare money to invest in August, but only enough to invest in one share, it would not be that one.
Instead of investing in a single business, I would buy shares in a pooled investment vehicle that would give me access to a diversified range of holdings.
Specifically, I would invest in the venture capital trust Income and Growth (LSE: IGV). Lately, it has been trading close to its 52-week low price, offering me an attractive entry point at the moment.
As dividend shares go, it is a particularly juicy one when it comes to yield. Right now, the yield is 11%.
Things could get even better at some point. Whereas the dividend per share last year was 8p, in 2020 it was 14p. If the payout returns to that sort of level, the prospective yield at the current share price could be a mouth-watering 19%.
But there is no guarantee that will happen. In fact, there is no guarantee the dividend will even be maintained at its current level. The trust aims to pay at least 6p per share in dividends annually. Again, there is no guarantee that will happen (although it has for the past 11 years in a row).
Whether a company can consistently pay dividends at a given level depends on its business performance. The current high yield at Income & Growth may suggest that some investors are wary about its future dividend prospects and valuing the shares accordingly.
The main risk I see to the dividend is Income & Growth’s business model colliding with a challenging economy.
The trust invests in small and medium companies like Virgin Wines and MyTutor, hoping to benefit from their growth. To do that, it usually ends up selling its stake – but that could take many years.
After raising more funds last year, the trust has liquidity it can use to support businesses in which it has invested even as they navigate choppy economic waters. That could mean fewer stake sales in coming years, generating less money to fund dividends.
Why I’d buy
Even if that happens and the yield on this dividend share falls, I would not necessarily see it negatively.
If the trust has invested in promising companies and supports them, over time, some of its stakes ought to grow in value. Even if that gain is not realised yet to be paid out as dividends, it could help boost the value of Income & Growth shares over the course of time.
With a track record of investing in some excellent young companies that go on to prosper, I would happily hold Income & Growth in my portfolio.