I own several dividend shares in my Stocks and Shares ISA. I find this type of investment to be an excellent way to earn additional income.
After all, dividends are typically a portion of a company’s profits. But with thousands of potential options to pick from, are there any that stand out from the crowd?
Let’s investigate further.
How I’d find the best
When searching for the best dividend shares, I run a scan to narrow down my options. For instance, there are almost 2,000 stocks listed on the London Stock Exchange.
But many of these won’t be suitable for dividend income. First, I’d look for a dividend yield between 2% and 11%.
A yield greater than 11% looks suspicious, in my opinion. It might not be sustainable, so it would warrant extra caution. And a yield below 2% seems too small when I’m searching for the best dividend income.
Next, I’d look for a dividend cover that’s greater than 1.2. This measures how affordable a dividend is in relation to a company’s earnings.
Stability and reliability
I want to avoid tiny penny stocks as I’m just looking for established and more stable businesses. That’s why I’d focus on companies that have a market capitalisation no less than £50m.
Finally, I like to see a dividend history. Companies that have been paying out income to shareholders for several years are seen as more reliable than those with a limited track record.
After filtering all these criteria, it results in around 150 shares. And from this I would do some due diligence and homework to make my final selection.
‘No-brainer’ top picks
For 2024, if I had spare cash to devote to dividend investments, I’d buy British American Tobacco, Natwest, IG Group, BP, and Sainsbury.
So what made these five stand out from the rest? One reason for this selection is that they operate in completely different industries. That spreads my risk and prevents me from putting all my eggs in one basket.
On average, this group offers a 7% yield, a dividend cover of two, and a whopping 22 years of back-to-back payouts.
That all sounds wonderful to me.
Food for thought
As dividends are typically paid from earnings, steadily growing profits could lead to higher payments over time. So it’s worth noting that this selection has on average grown its earnings by 13% a year over the past five years.
Bear in mind that past earnings don’t predict future earnings, but it can give an indication of a company’s profits in recent years.
Each share has its pros and cons. For instance, British American Tobacco’s commitment towards “building a smokeless world” is likely to cause near-term challenges to the business.
That said, it now offers a jumbo 10% dividend yield, and a price-to-earnings ratio of just six times. Its price to free cash flow ratio is the lowest it has been in decades. All of this suggests that it’s super cheap.
Similarly, my other top picks have points to debate about, but overall I’m confident in their ability to provide reliable dividend income in 2024 and beyond.
