‘Tis the season for investors to review their strategies for 2024 and beyond! Below, a few of Fool.co.uk’s dividend-minded contract writers outline their strategies for a second income…
Andrew Mackie
Although storm clouds continue to hover over the UK economy, 2024 I believe is shaping up to be a very good year for investors chasing passive income streams. My preferred method is to buy shares in companies with strong dividend cover and looking to grow payments over time.
The FTSE 100 is jam-packed with commodities businesses, many of whom offer very attractive yields. I particular like BP, Shell, Glencore and Anglo American. This is because they prioritise large chunks of free cash flow toward shareholder returns.
Take Shell as an example. In the last three years, dividends per share has risen by over 100%. Analysts have pencilled in a 11% increase over the next two years.
This year has not been a great year for the oil and gas industry as a whole. When oil hit $120 after Russia invaded Ukraine, investors were piling into the sector. Fears of a slowdown in the global economy have led many to argue that 2022 was an outlier year. I don’t sit in that camp.
The demand side for oil will undoubtedly be affected should we tip into a recession. Despite oil prices sitting 28% higher than where they were pre-pandemic, the sector as a whole continues to remain conservative toward capital allocation. As long as companies continue to gush free cash flow, I don’t expect capital trends to change anytime soon. As a result, I just find it hard not to be bullish for the oil sector moving forward.
Andrew Mackie owns shares in BP, Shell, Glencore and Anglo American.
Jon Smith
A key factor for me in 2024 is focusing on dividend forecasts, not just the dividend yield. Most major companies will report the full-year results in Q1. This usually coincides with the announcement of a dividend, so it’s good to get a head start on planning in December.
As we’ve now had most of the financial year, I can look at analysts forecasts for what the expectation is for dividend potential. The stocks that are likely to boost dividend payments should warrant a higher spot on my watchlist then before.
For example, WPP is forecasted to increase the dividend per share from 39.4p this year to 41.6p next year. Given it currently has a 5.45% yield, I’d expect it to increase. This is one stock that I’m considering to buy within the coming couple of months.
On the other hand, I’d look to avoid Mobico Group. Even though the 9.63% yield looks attractive now, the expectation is for the dividend to fall from 6.7p in 2023 to 5.2p in 2024. It’s true that the business is struggling, so the long-term income potential here might not be worth it.
This shows that using the forecasts for next year can help me to make more informed investment choices.
Jon Smith has no position in any shares mentioned.
Roland Head
Many big UK financial stocks are offering unusually high dividend yields right now. It’s easy to find well-established companies yielding 6% to 10%.
Of course, high yields can be a sign that problems lie ahead. Many investors use 6% as a rule of thumb for dividend safety. I understand why, but in this case I’m not sure that this rule makes sense.
Investors’ main fear seems to be that a recession will hit the global economy next year, with knock-on effects for financial businesses. I can’t rule out this risk, but I’m not seeing any sign of it yet.
Companies such as Legal & General (8.3% yield), life insurer Phoenix Group (10.8% yield) and M&G (9.4% yield) have all reported fairly stable trading this year.
My analysis of these companies’ recent results suggests to me that their dividends are supported by genuine surplus cash being generated from their operations. I think they look cheap.
I’m planning to increase my exposure to this sector as we head into 2024, with a view to boosting the income yield I receive from my portfolio.
Roland owns shares in Legal & General Group.
