Like many investors, I like the passive income potential of owning dividend shares. As dividends are never guaranteed at any company, I try to choose carefully when constructing a diversified portfolio of shares.
Here are five dividend shares I think investors should consider in the current market.
Financial services firms
It is important not to rely too much on one sector when constructing a diversified portfolio. However, many of today’s high-yield UK shares are in financial services.
Legal & General has an 8.5% yield. It has cut its annual dividend growth target to 2%, but that is still growth – and from a high base to boot.
I like its focus on retirement-linked financial services, as demand is high and resilient. But the planned sale of a large US business could mean lower earnings in future.
Another financial services share to consider is insurer Aviva. It is the UK’s largest insurer and has over 20m customers globally. The proposed integration of Direct Line risks distracting management, though could also boost profitability. Five years on from a dividend cut, Aviva yields 5.9%.
Cash generative industry but in decline
Having raised its dividend per share annually for decades, but still yielding 6.8%, it is easy to see why British American Tobacco (LSE: BATS) is popular with many income investors.
The hefty net debt worries me slightly, but what I see as the key risk here is the ongoing decline in cigarette smoking. British American is growing its non-cigarette business and fags themselves may be around for decades even if fewer people smoke them.
Meanwhile, the company remains highly cash generative and its portfolio of premium brands gives it pricing power.
Smaller companies
Those three shares are FTSE 100 giants — but it is worth looking in the FTSE 250 for dividend shares to consider too.
Take ITV (LSE: ITV) as an example.
Over five years, the ITV share price has grown 16% despite turbulence along the way. It currently yields 6% and aims to maintain the annual dividend per share at least at its current level.
ITV is really two businesses. One is as a broadcaster, both terrestrially and digitally. That is very lucrative but in recent years investors have fretted about the effect of digital options fragmenting the advertising market, putting ITV’s big ad revenues at risk. It has pushed heavily into digital platforms itself to try and mitigate that.
The second business is providing studio space and production assistance to other content makers. I like the way that can mean that ITV can actually profit from its rivals doing well and making more programming.
To me the share continues to look cheap and I think its dividend is an attractive part of the investment case. The same applies to another FTSE 250 share I own, polymer manufacturer Victrex.
The Victrex share price has tumbled three-fifths in five years, pushing the dividend yield up to 7.6%. Weak demand in some markets remains a significant risk to profits.
But with its proprietary products and focus on mission-critical product applications, I reckon Victrex is a possible bargain to think about from a long-term perspective.
