Whether it’s spent or saved, a second income stream to draw on is worth its weight in gold.
For me, the easiest way of generating such cash is via dividend shares. I’d go so far as to say there are some companies out there that could conceivably pay me for the rest of my life.
Here’s what I look for
Before naming some of these Dividend Aristocrats, it’s worth spending a few seconds explaining why I’m positive about them. You see, many quality income stocks tend to have similar characteristics.
One thing I look for is evidence that a company has reliably thrown cash back to its shareholders. Ideally, we’re talking decades of dividends here. Two or three years isn’t really sufficient.
The second thing I like to see is that the amount of money returned has been regularly hiked. As well as being nice in itself (who doesn’t like receiving more cash?), this tells me that business has been healthy for a while.
Solid dividend payers tend to have resilient balance sheets too. This may be due to long contracts or because demand for what they provide or sell is fairly constant. In tricky times, payouts from heavily indebted firms can be cut to shore up cash to service debt.
All of this information can usually be obtained with a quick scan of the investor relations pages on a company’s website.
So here’s a sample of stocks that fit the bill and that I’d buy like a shot if I had some spare cash today.
Dividend hall of fame
From the FTSE 100, I believe that defence giant BAE Systems, drinks seller Diageo and international distributor Bunzl all score well.
Then again, the crown surely goes to life-saving tech firm Halma. It’s raised its dividends by 5% or more for… 44 consecutive years.
From the more domestically-focused FTSE 250, I like meat supplier Cranswick and self-storage firm Safestore.
Interestingly, all of these companies have payout ratios between 20% and 50%. This is the proportion of earnings that are paid out to shareholders. As a rough rule of thumb, anything in this range should be sustainable.
One quick caveat worth mentioning is none of the above offer eye-popping dividends and that’s fine. Since I’m after a second income for life, I’m looking for consistency rather than size here. Besides, those appearing to offer sky-high yields often end up cutting them.
No guarantees
Having said all that, I must remember that no income stream is ever truly safe. For evidence of this, cast your mind back to the pandemic. In May 2020, oil giant Shell was forced to cut its dividend for the first time since… the Second World War!
To be fair, this pain was short-lived and Covid-19 was a once-in-a-century event (we hope!). But this shows that even the most reliable payers can come unstuck.
Safety in numbers
This is why spreading my cash around is so vital. If I hold shares in one consumer goods stock, I need to question whether it’s worth owning a second. If I buy shares in one pharmaceutical, do I need to be invested in another? Probably not.
In theory, this strategy should mean that I keep receiving passive income every year, even if a few of my stocks run into trouble.
