Since June 2022, my wife and I have spent more than a year building a new family portfolio. After investing three large lump sums and buying 27 new stocks, this collection of shareholdings is complete. And one thing that stands out is how dividend shares dominate this pot.
I love dividend shares
In my 37 years as an investor, my approach has evolved largely into a value, fundamental, and dividend strategy. In other words, I like to buy shares trading on lowly earnings multiples that offer decent cash yields.
However, I am not averse to buying growth in the form of powerful, high-quality businesses. For instance, some of our largest stakes are in the four US mega-cap tech giants that dominate the S&P 500 index.
Also, I’m aware that capital growth and dividend returns are interchangeable. A share growing at 10% a year paying no dividends will produce the same returns as a stock paying a cash dividend of 10% a year with dividends reinvested and no capital growth. Ignoring charges, the figures should be identical.
With all that said, dividend income is absolutely a key part of our expected long-term investment returns.
Three high-yielding dividend dynamos
For example, the following three shares offer among the very highest dividend yields in the FTSE 350. My table is sorted alphabetically.
| Company | Sector | Share price | Market value | Dividend yield | One-year change* | Five-year change* | When we bought |
| M&G | Financial | 183.85p | £4.3bn | 10.6% | -9.3% | -18.4% | This month |
| Phoenix Group Holdings | Financial | 506.2p | £5.1bn | 10.0% | -21.7% | -29.1% | This month |
| Vodafone Group | Telecoms | 70.67p | £19.1bn | 11.1% | -41.1% | -59.7% | December 2022 |
The first point I’d make is that owning these three stocks over the past one to five years has been something of an ordeal. Across all three, the average price decline over 12 months is almost a quarter (-24%). Meanwhile, over five years, this mini-portfolio would have lost more than a third (-35.7%) of its value. Yikes.
As a result of these steep price declines, all three stocks seem to be value/dividend shares to me today. They offer cash yields in the double digits, with the average dividend yield being 10.6% a year. And that’s why my wife and I bought one of these stocks last December and the other two earlier this month.
Now for the bad news
As an experienced investor, I know two things. First, that future dividends are never guaranteed, so they can be cut or cancelled at any time. Indeed, dozens of FTSE 350 companies slashed or suspended their cash payouts during the Covid-19 crisis of 2020/21.
Second, history has taught me that shares usually don’t offer double-digit dividend yields forever. Either share prices move up and reduce these high yields — or dividends get cut, also dragging down yields.
In other words, I’m not expecting these three dividend shares to keep paying out 10% a year in cash indefinitely. Indeed, I suspect that at least one of these companies might lower its payout in 2023/24. Which it might be, I am unable to say. But were this to happen, I hope that it would not hammer the shares too hard!
