Dividend stocks are great for passive income during economic tough times. These stocks can return consistent payments even when the stock market isn’t performing.
And while no-one can predict the future, the short-term outlook is shaky. Growth forecasts for Q3 2023 were just revised downwards and a shocking 0.3% contraction was revealed for October.
We might already be in a recession – and now might be the perfect time to snap up modestly priced dividend stocks.
Dividend mistakes
How to sniff out the best of these dividend-payers? Let’s look at my process.
The UK is a good place to start. The FTSE 100 boasts some of the highest dividend yields the world over, comfortably beating the top index yields of France and Japan and returning nearly triple that of the US.
But focusing only on dividends is a mistake. While seeing cash payments pop up in a brokerage account is pleasing and hard to ignore, other ways for companies to deploy their earnings can be equally effective even for bona fide dividend stocks.
One example is share buybacks – when a company spends earnings buying its own shares to reduce the number of total shares in issue.
Tangible returns
Share buybacks aren’t tangible returns, so a lot of investors ignore them. But they’re an equally effective way to return cash to shareholders and even have some advantages. For one, they’re a sign of management’s conviction in the company and that the shares are undervalued.
Another advantage to buybacks is they aren’t taxed. Anyone investing outside of a tax shelter like an ISA might enjoy the lower tax bill.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Perhaps most importantly, the average return of FTSE 100 stocks – dividends and buybacks together – is around 6% right now.
Even ignoring share price increases, that’s a higher total than interest rates and inflation. And picking the best stocks would hopefully return me much more.
Owner’s mentality
Whether my returns come from dividends, buybacks, or whatever else, this is still a minor aspect of how I choose a stock to buy.
I don’t want to invest because of a big number on a spreadsheet. I want to treat the purchase as if I’m becoming a part-owner in a company – which I am, of course, in a small way.
Having an ‘owner’s mentality’ can transform the process of buying or selling stocks. Rather than focusing on future dividend payments, I’m looking at how the company and management are poised to sustain and grow revenues. Sometimes that might even mean below-average dividends.
A well-run business will likely be a lucrative investment although there are no guarantees with any stock.
The old Warren Buffett quote springs to mind: “Buy into a company because you want to own it, not because you want the stock to go up.”
With this approach, I hope to buy world-class dividend stocks that I can leave alone for a decade, confident that the dividends will be ‘just right’ along the way.
