When eyeing up dividend stocks to buy for a new ISA, it’s not just about grabbing the highest yields. The dividend could be a trap if not backed by solid profits, strong cash flow and a sensible balance sheet.
When relying on dividends for long-term income, you need to understand the whole picture — not just one headline number.
What to look for beyond yield
With income shares, earnings coverage is key. You want a company that pays out only a portion of its profits, leaving room to reinvest in the business when needed.
Cash coverage matters too: actual cash flow should comfortably cover dividends, not borrowing or selling assets. That’s why debt is also critical — a highly leveraged company has less room to manoeuvre when interest rates rise or profits dip.
Payment history is the final check. A long, consistent record of paying and ideally growing dividends tells you management takes income investors seriously.
Plenty of UK names tick many of these boxes, albeit with caveats. LondonMetric Property benefits from regulated income and has a solid track record, but coverage is thin. British American Tobacco’s payouts are supported by strong earnings, but cash flow cover is tighter than ideal. And Diageo, while historically a reliable dividend grower, has recently suffered serious share price losses.
But among them, one dividend stock stands out as particularly appealing to me right now.
A sustainable dividend payer
From a coverage point of view, I find Hikma Pharmaceuticals (LSE: HIK) particularly appealing and worth further research. The group has just reported another year of double‑digit revenue growth, with 2024 sales up 10% and profits rising sharply. It recently increased its total dividend to 84c per share, a further 5% raise after last year’s 11% boost – that’s confidence in future cash generation.
On today’s numbers, the shares offer a dividend yield of about 5.1%, with a payout ratio around 45%. Cash flow covers the dividend roughly 3.3 times, and the company has now clocked up 21 years of uninterrupted payments. Those are exactly the kind of characteristics I look for with payouts that are sustainable, not stretched.
Under the surface, Hikma has a diversified business across injectables, branded medicines and generics, with strong positions in North America and the MENA region. Demand for affordable treatments and hospital drugs tends to be fairly resilient through the economic cycle.
There are risks, of course. Drug pricing pressure, regulatory setbacks or margin squeezes in its injectables division could all hit profits and sentiment. And like any global pharma name, it’s exposed to currency conversion losses and geopolitical risk.
Why this matters for a fresh ISA
For passive income investors, holding reliable dividend payers inside an ISA can be a powerful combo: you get regular cash coming in, and those dividends are shielded from UK tax.
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.
That income can be reinvested to build your pot faster while you are still working, then switched to spending money later on.
In my view, considering solid names like Hikma with higher-yielders gives an ISA a stronger foundation – one that still delivers income while reducing volatility.
