Buying company shares for their dividends can be a great way to collect passive income.
However, the biggest challenge is finding the best stocks to pick. I’d start my search by concentrating on the domestic market in the UK. That’s because the culture of paying shareholder dividends is strong among British companies.
Secondly, I’d favour larger, well-established businesses over smaller outfits. Often, companies in the FTSE 100 and FTSE 250 indexes have long records of trading. Smaller businesses are often newer and can suffer from volatile trading.
However, it’s worth remembering that volatility is a fact of life in the stock market. Even large enterprises can suffer from setbacks and challenges leading to variable profits and dividends.
That’s particularly true among those businesses with cyclical operations such as in sectors like retailing, hospitality, mining, travel, banking, and others.
Nevertheless, focusing on the dividend yield itself can be a good place to start screening for stock candidates.
I could begin by looking for a yield of 5% or above. Then perhaps eliminate the stocks in obviously cyclical sectors because their dividends can be volatile over the long term.
Here’s what that search threw up as a list to consider:
|Approximate forecast dividend yield
|British American Tobacco
That’s not a bad list. However, I’m chucking out British American Tobacco and Imperial Brands. They deal in products for smokers, such as cigarettes and vapes. But there’s a lot of regulatory risk in the sector and cigarette volumes have been in long-term decline.
It’s possible the high dividend yields of those two are more of a warning to investors than they are an opportunity. However, I could easily be wrong about that. Nevertheless, they’re out!
Steady dividend payments
My next test is to look for a consistent record of dividend payments over the past few years. To me, there’s nothing worse than a patchy dividend record. So, I’m booting out Vodafone, BT, DS Smith, and TP ICAP.
That leaves four contenders: National Grid, Hargreaves Lansdown, IG, and Telecom Plus (LSE: TEP).
Of those, Telecom Plus has the highest compound annual growth rate for the dividend. It’s running at well over 9%.
The company is a leading multiservice utility provider. It owns the Utility Warehouse brand and offers bundled household services such as broadband, mobile, energy, and insurance.
The setup is different from most competitor businesses. That’s because of the way the offering is marketed via a nationwide network of ‘Utility Warehouse Partners’, or agents, as we could describe them.
There’s no guarantee that the firm’s service will continue to resonate with its customers. Even companies with strong dividend growth can go on to deliver losses for shareholders if the business runs into operational difficulties. Perhaps one of the biggest threats to Telecom Plus is that it operates in competitive markets.
Nevertheless, the company has an impressive record of multi-year growth. On top of that, the outlook statement in last November’s half-year results report was upbeat.
That’s why Telecom Plus is my top passive income stock to consider for 2024.