When I began investing in dividend shares, I was understandably wary. I had been told that they’re a great way to earn passive income, but I didn’t know where to start. There were so many companies to choose from — how could I know which one’s were reliable?
On top of that, memories of the 2008 financial crisis still lingered in my mind. How could I be sure I wouldn’t be a victim of the next crash?
Looking back, my only regret is not starting sooner. Sure, I made a few bad picks early on but nothing serious. After a few years of patience and dedication, I’m finally seeing some real results.
So how can you replicate this strategy?
Paving your own way
The truth is, everybody’s investment journey is unique. We all have different financial situations and market conditions change from day to day.
But there are a few tips and tricks that apply to everybody. One of them is investing via a Stocks and Shares ISA. This allows UK residents to invest up to £20,000 a year without paying any tax on the profits.
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.
But an ISA alone won’t guarantee success. To improve your chances of earning sustainable income, you need a rock-solid portfolio of dependable dividend payers.
Here’s a few ways to identify companies that have sustainable dividend policies.
Looking further afield
Popular FTSE 100 stocks such as Unilever, National Grid and Legal & General are frequently noted as some of the most reliable dividend stocks in the UK. But I’ve covered all three in depth, so today I’m looking at a lesser-known company.
As you will see, it’s just as impressive as some of those big names and equally worth consideration.
Anglo-Eastern Plantations (LSE: AEP) ticks almost all the boxes when it comes to reliable dividends: a decent yield (4.2%), exceptional cash coverage (20 times) and a 34-year-long track record of payouts.
So there’s almost no reason to fear a dividend cut in the short-to-medium term.
In the last fiscal year, it boosted its dividend by a massive 58.7% and yet still maintains 62% of its profits for day-to-day operations. It has a strong net margin of 20.25% and return on equity (ROE) sits at a more-than-sufficent 16.5%.
And to top it all off, the share price is up 224% in the past 10 years.
So what’s the catch?
First up, it’s still a small company, with a market-cap of only £607.7m. Second, it makes palm oil, an ethically-questionable product that faces increasingly strict environmental regulations. Plus, it operates mainly in Indonesia, a region prone to wild weather that can disrupt operations and decimate profits.
So while it’s an excellent example of what to look for in a top-dividend paying stock, it certainly isn’t risk-free.
The bottom line
When building a portfolio of dividend shares, it’s important to find balance. A stock like AEP Plantations can make a great addition — as long as several more stable, defensive options are included to lessen the risk.
Not for you? That’s okay, each individual has their own risk profile. Fortunatley, it’s only one of many income opportunities I’ve identified lately…
