There are three things I want to see in dividend shares — a strong dividend policy, a cash cow business, and long-term safety. Here are three stocks I think are worthy of further research with that in mind.
Top insurance
Can insurance shares be considered safe? When it’s Legal & General Group (LSE: LGEN), and we look at the long term, I think they can.
Legal & General does pensions, asset management, and invests in a diverse range of assets. It doesn’t insure space rockets.
In the short term, it can be volatile, like most financial stocks in the past decade. So maybe we’ll see an up-and-down share price, and a dividend that could face pressure at times.
But in the long term, I see a solid cash cow in this business. And the firm does prioritise dividends. In its results updates, it tends to talk about “confidence in our dividend paying capacity” and things like that.
There’s a forecast yield of 8.8%.
Safe as them
Next up, a company that builds houses. It’s Taylor Wimpey (LSE: TW.), with a forecast 6.6% dividend. Again, the safety might look a bit suspect in the short term. Pressure on the UK property market can squeeze the share price and the dividend, as we’ve seen so recently.
But what about the long term? Well, the country’s in the grip of a chronic housing shortage, and a high proportion of people want to buy rather than rent. That has to be good.
And what does Taylor Wimpey say in its trading updates? I read about “an attractive market with significant unmet demand“, a “strong landbank“, and things like that.
With its last FY results, the firm also spoke of a “dividend policy to return 7.5% of net assets per annum, or at least £250m annually“.
Rock solid
Finally, Rio Tinto (LSE: RIO), which has some things in common with the others. It’s been through a down spell. And we’ve had an erratic few years for the share price.
The dividend yield’s been variable too, but currently offers a forecast 6.5%.
Rio Tinto’s one of the world’s real mining giants with a variety of products. It has copper, iron, aluminium, lead, gold, diamonds… and most of its income derives from industrial metals, not vanity products like gold and diamonds.
In the long run, there’s not going to be an end to demand as long as human industry still exists on the planet, is there?
And “we will continue paying attractive dividends,” said CEO Jakob Stausholm at FY results time.
Risk and safety
Talking of safety, these three share the same kind of risk. It’s cyclical risk, as they’re all in businesses that typically go through up and down cycles over the years.
So I’d never touch any of them if I didn’t intend to buy and hold for a decade or more. And to take home passive income now? No, maybe not.
But to build a pot, through dividend reinvestment, to generate passive income in the future? Yes, I invest in these sectors.
