Passive income in shares through dividends

Passive income in the stock market comes by way of dividends. Dividends, for those who don’t know, are a distribution of a company’s profits to its shareholders. It is easy to forget, but when you invest in a company you become a (very small) partial owner of that company.

Shares usually come with voting rights, and large corporate deals often involve some purchase or sale of shares. As a partial owner, investors get to shares in the profits without actually having to work for the firm (or much at all). This is passive income at its purest.

Not all companies pay dividends of course, and those that do pay different amounts. It is also a precautionary tale that, just as with a business you run, there can be good times and bad. When times are good you will earn more profit (that is dividends), but when times are bad you will earn less or even none.

Dividend yield is key

One of the greatest benefits of earning passive income through shares is that dividends are not actually paid as a percentage. In the UK firms pay dividends on a pence-per-share basis. Naturally the high the payout the better, but as a percentage return on your investment, it is highly dependent on the share price.

This can be great news, because even if a firm has not changed its dividend payout, when its share price is low you can “lock in” a high dividend yield. The dividend yield is simply the percentage annual return on your investment – in simple terms calculated as dividend per year/share price.

Of course, judging the share price is a little more difficult. Though it may be easy to see when a low price is driving a high dividend yield, it is harder to know if this is a short blip in the stock or a fundamental shift.

Many such blips happen all the time, when some short-term news story drives selling for example. In these cases, the fundamental strengths of a firm don’t change, just immediate public opinion. Fear and greed are usually the main drivers of share prices in the short run.

Sometimes, however, the problems bringing the price lower will be more fundamental. If weaknesses in a company are driving the price lower, it will not be offering good dividends for long.

Despite this, though, some basic guidelines can help. Always look at larger, blue chip forms, for example, which usually run less risk of a massive share price crash. Diversify across a number of dividend shares to lessen the risk of any one company on your portfolio.

As I said, passive income is by no means new. With good guidance and some common sense, investing in shares could be the way forward for many people.

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A dog is for life…

Today’s news makes the fourth revision higher for the firm since September. In January it raised its full-year profit expectations to £77m. Today it raised them again to £88m.

Though I am reminded of the old adage that “a dog is for life, not just for Christmas”, pet ownership in the UK has increased massively since Covid-19 first struck.

This makes sense, of course. Aside to the obvious benefits to mental health, those who previously worked in offices may not have had the time to take care of a pet. Working from home they now do. 

Naturally in the long run, this would seemingly benefit Pets at Home and its share price. Simply put the more people who have pets, the more people will need to buy pet supplies. It is no surprise that the Pets at Home share price is now double what it was in March last year.

Pets at Home share price long term

Of course, we hope, that eventually lockdown will end and the world will return back to normal. As I said, the Pets at Home client base will have already increased by this point.

The main risk I see with the Pets at Home share price is that it may be too high to be a good investment right now. Obviously we would always prefer to buy on a dip, and Pets at Home is at its peak right now.

That said, I do think the company has a lot of fundamental strengths. Its combination of shop, pet, and grooming service, for example, bring about a lot of cross selling. You go in the shop to get your dog a check up, and walk out with two new toys and a grooming appointment.

This kind of in-shop strength was reflected in its numbers earlier this year, which showed both online and in-store retail sales increasing. In this time of the trend towards digital shopping, such numbers in bricks and mortar stores are good to see.

Unlike many large companies, Pets at Home has good customer loyalty. It has a VIP (Very Import Pet) loyalty programme with vouchers and deals. Your pet even gets a birthday card each year. These aspects seem silly perhaps, but we Brits love our pets. For a company to convey this same love of animals will keep customers loyal.

Again from an investment perspective, there are some potential downsides. Personally I am quite bullish on Pets at Home, but its share price does not seem cheap at the moment.

Naturally the benefits it is seeing from lockdown will fade when that (hopefully) finally comes to an end. Though I suspect the new customers gained will remain, the ever-increasing profit guidance probably will not.

For now though, this latest update has been good for the Pets at Home share price. Lets see what the future holds.

The post Why is the Pets at Home share price up 4% today? appeared first on The Motley Fool UK.

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Karl has no position in any of the shares mentioned  The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

BAE Systems

BAE Systems (LSE: BA) has been a key component of my portfolio for many years. It has been a solid performer, in a sector that is less prone to rapid fluctuations. That makes it defensive, in both senses of the term.

Its current yield of about 4.5% is by no means the largest out there, but it has been consistent. I also feel that in times of risk, like we are in now, BAE’s prospects seem fairly secure. The UK government, for example, announced its intentions last year to increase defence spending.

Of course no share is without its risks. My main concern across most sectors right now is the potential for a global recession on the back of Covid-19. BAE makes much of its money from exports to other nations. This could be at risk for its profits and share price.

BP

Another share that has been in my portfolio for a while, BP (LSE: BP), has growth as well as income potential, I believe. However the growth side is probably the riskiest aspect. Oil prices have bounced back somewhat from last year’s lows, but any global recession could put a halt to this.

In terms of dividend shares, however, I think BP is a strong play. Despite cutting its dividend last year, and seeing its share price recover a lot of ground, it is still yielding about 5%. It also has a pretty solid record of dividend payments. If its income stream remains stable, I am sure its dividend payout will as well.

GlaxoSmithKline

With Covid-19 vaccines dominating news headlines for months now, it is no surprise a pharmaceutical firm makes it onto my list. In terms of dividend shares in the sector, GlaxoSmithKline (LSE: GSK) comes out ahead in the majors, offering a yield of about 5.5%.

Though I don’t expect GSK to benefit directly from the vaccines, I suspect the sector, as a whole, should do going forward. It looks almost certain that Covid-19 will be with us for some time. Treatments, vaccines, and government support should help bolster the sector.

Again, no investment is without its risks. As with the others, I think global recession is the biggest one for GSK at the moment. Big Pharma suffers from the purchase of non-branded versions of their drugs in countries like China.

In times of recession, this becomes an even bigger problem, and one that governments may be less inclined to stop. Making medicine more expensive for the poor does not play well politically.

The post My 3 favourite dividend shares right now appeared first on The Motley Fool UK.

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Karl has shares in BAE Systems and BP. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investing for income vs. investing for growth

It is worth noting that many guidelines are good rules-of-thumb when investing for either income or growth. Choosing a firm with good finances and planning to hold for a longer period of time, for example, would suit many investment strategies.

However, when looking for income specifically, a general rule is that you forgo the potential for large, quick capital gains. Though this is not always the case, of course, minimising the risk of losing your capital is key. This usually means you also minimise the potential for rapid, exponential capital gains.

With that in mind, here are some specific things to consider when your primary consideration is income.

Hold on to your money

As I said, when investing solely for income, capital gains should not be of as much concern. However, losing your capital should be. All the income in the world won’t help if you lose your initial investment.

Personally, this means my income investments are usually larger, blue-chip companies – almost always those found in the FTSE 100. In addition I look for companies with a solid set of finances. I want to see both profit and growth having grown steadily year-on-year.

Simply put, you want a company that can afford to keep on paying its dividend.

Dividend history

This brings me to my second consideration when investing for income – the company’s dividend paying history itself. I would want to see a steady, regular payment history, with few fluctuations. A company can stop paying dividends at any time, so a good payment history is no guarantee. But it is usually an indicator of the company’s commitment to pay its shareholders. 

I also look for dividend growth year-on-year. Ideally, I want this to have been inflation-beating, usually meaning anything above 2%. Of course the higher, the better, as long as it coincides with similar profit growth for the company. It is not unknown for troubled firms to entice investors with high dividends they perhaps should not be paying out.

The yield

The final consideration is, of course, the dividend yield. A company pays out a dividend on a pence-per-share basis. This means that to measure the percentage return on your investment, you also need to look at the share price.

Luckily this opens up a lot of potential to ‘lock in’ a good dividend yield when the share price is low. Of course, why the share price is low is the key consideration. If there is a fundamental issue with a firm, then the price may keep dropping.

However, there are frequently opportunities when a stock is oversold but maintaining its dividend. A yield that was 3% when a share was doing well can become 5% when it is out of favour, even though the company has not changed its payout.

A good investment is one that suits the investor’s needs. When investing for income, however, these guidelines are a good place to start.

The post What to look for when investing for income appeared first on The Motley Fool UK.

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Try to reduce risk

If investing with income as the main goal, risk to the initial capital should be at the forefront of one’s mind. A good dividend share is one that maintains, or preferably increases, the capital invested.

From a practical standpoint, this usually means looking at large, well established firms. Companies with a strong brand and a long history, like those in the FTSE 100, are generally seen as having a lower risk profile.

Of course this alone is not enough. It is always worth looking at a company’s finances. I look for a steady history of increasing revenue and profit. Depending on the sector, lower levels of debt are usually a positive as well.

Not only does this help mitigate the risk to the invested capital, but should help establish a firm’s ability to pay dividends now and in the future. If a company has poor finances, should it really be handing out cash to investors?

Dividend paying history

Past performance in no way guarantees performance in the future. Nevertheless, I think a company that has historically paid steady dividends is usually a better choice that one with a spotty record of dividend payments. Consistent payouts, over say the last five years, can indicate a firm’s commitment to its shareholders.

Coupled with this, I think it is always worth looking for dividend growth. A company that has seen its revenue and profits increase year on year, should be able to increase its dividends each year as well, in my view. At the very least a good income share should see dividend growth above inflation.

A good dividend yield

Yield is considered by many to be the most important aspect of a good dividend share. I think has to be considered in context. For anyone who is unsure, a company pays out dividends on a pence-per-share basis. This means that the percentage return on an investment – the dividend yield – is based on the share price at that time.

This can be both good and bad. Classically investors will try to buy a share when its price is low for good growth prospects. From an income perspective, investors are also able to ‘lock in’ a good dividend yield if a share price is low.

Of course the reason the share price is low is critical. If a company is fundamentally suffering, the low share price may be too risky. However, there are often many reasons why a company’s share price will be lower than its fundamentals warrant. Fear and greed are key drivers behind share prices, and neither of these emotions is dependent on hard facts.

As I began by saying, the true measure of a good dividend share is one that suits the investor’s needs. However when investing for income, I think these general guidelines are a very good place to start.

The post What I look for in a good dividend share appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

My top three criteria for dividend shares in uncertain times

Many of my normal rules for selecting dividend shares go out the window when times are risky. However, some become more important than ever. Even in these uncertain times, there are strong companies out there performing well. Some of these firms pay dividends. If their shares are trading at lower prices now, then it may be possible to lock in high yields.

Reduce risk with big blue chip stocks

In risky times, when looking to invest for income, this is one of my main rules. Dividend shares that lose your initial capital are bad investments, no matter how much they yield. I look for larger firms with a strong brand. In the UK this usually means looking at the FTSE 100.

There are still good yields to be found, but the size and strength of these companies should minimise the risk of losing money. Of course you still need to do your research, but common sense can help. Are you going to invest in the big airlines while nobody is flying, or is online shopping a better option during lockdown?

The best dividend-paying companies can afford to pay them

Perhaps an obvious statement, but a company that pays dividends should be able to afford it. Historically this has not always been the case. More than one firm has enticed investors with high payouts it can’t afford.

For this I look at a company’s finances. I want to see year-on-year growth in both revenue and, more importantly, profit. The impact of Covid-19 may have upset this pattern, of course. I have to consider the company’s prospects going forward, and the corona crisis may be a one-time blip. However, given the way 2021 is looking, I’m concerned that Covid-19’s impact is far from over. I would probably avoid shares that have been badly affected by the pandemic.

Linked with this, I look for consistent dividend payouts. I want a company that has paid dividends regularly for many years, preferably with dividend growth each year. Again 2020 could be an exception to this, depending on the firm’s specific situation.

Yields

Yields are the one area where these uncertain times can actually offer better opportunities. Dividend shares pay out on a pence-per-share basis, not as a percentage. This means the share price as well as the payment itself determine yield. A low share price means stronger percentage returns.

Again this is very much dependant on the firm, and needs good research. It is only a good investment when the share price is low for non-fundamental reasons. Things like a bad news story or short-term worries often hit stock prices, even when a company’s fundamental outlook doesn’t change.

For me, this seems an even more likely scenario in 2021. Find good, strong firms, and time your investment right. We should be cautious when finding dividend shares in 2021, but I think some great opportunities are out there.

The post How to find dividend shares in 2021 appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The numbers

Pets At Home said today that it expects to beat expectations for the current year, as it is able to remain open during lockdown. Specifically, it said sales momentum accelerated during Q3 in stores and online.

Though the company did not provide an exact growth figure, it did imply it would be greater than the 12.7% seen in Q2. It also said there was a “high teens” percentage increase in group like-for-like sales in December.

Pets At Home said it expects to deliver underlying pre-tax profits of at least £77m for the year. This excludes £28.9m in business relief it said it will pay back.

Though this is technically less than its previous guidance of £93.5m, that number did not take account of the business relief repayment. The figure is around £65m with this taken into account. This means today’s guidance represents an increase of 18% in expected profit.

The £80m in cash proceeds, after the company’s sale of Specialist Group last year, is also helping the numbers. The Pets At Home share price climbed as much as 12% today, though soon settled a little lower as profit taking took hold.

Long-term prospects for the Pets at Home share price?

To me, today’s news indicates the strength of the company during the Covid-19 pandemic. Pets At Home has seen its share price double since the first March lockdown. Its position as an essential retailer has helped it maintain its already strong business model.

In addition, pet ownership during lockdown has increased across the board. Though I am reminded of the old adage “a dog is for life, not just for Christmas”, it is to the benefit of Pets At Home.

This is not surprising, of course; working from home offers the perfect opportunity to give a pet the attention it needs. When you are stuck in your house all day, walking a dog is a very attractive prospect.

As well as the headline positivity from today’s guidance, other long-term factors can be seen. The increase in retail sales, for example, is very positive given the broader move to online shopping.

For many, going to Pets At Home is more than just buying your pet essentials. The combination of veterinary services, grooming, and shopping has a lot of cross-selling potential. You go to have your dog’s hair cut and come home with three new toys.

Its customer base is also loyal, with its Very Import Pet (VIP) loyalty programme helping create a close customer bond even for such a large retailer. Your pet even gets a birthday card, and deliveries are addressed to your pet “care of” you. Silly, perhaps, but it works for those of us who love our furry friends.

Today’s update may be helping the Pets At Home share price in the short run, but I think investors may have even more to look forward to in the coming years.

The post Why is the Pets At Home share price up 6.5% today? appeared first on The Motley Fool UK.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why is a bond hurting the Trainline share price?

For those who are not sure, a bond is simply a debt security. A company or government borrows money from investors, in return for a fixed interest rate (called a coupon) over a fixed period of time.

A convertible bond, like the one that is hurting the Trainline share price today, takes this one step further. A convertible bond allows the holder to change the bond into shares if they want to. These shares are almost always newly issued, which mean they dilute current shareholder positions.

Dilution hurts a share price because it means a company of the same value is divided into more pieces. In a simplified example, if a £1m company had 1 million shares in issue, each would be worth £1. If the next day that same £1m firm issued a further 1 million shares, each would now be worth just 50p.

This is why today’s news from the Trainline that it will be issuing a new £150m convertible bond is hurting its share price so much.

More problems

The company said it is issuing the bond in order to provide liquidity, “protecting the business further in an extended Covid downturn scenario”. If people are not booking trains, then Trainline is not making money. Further lockdowns in the UK will only make this worse.

Its first-half results in November showed some worrying figures. Ticket sales were just 19% of the level from the previous year, while revenue was about a quarter of H1 2019 and gross profit was one-fifth. Unlike the train companies themselves, Trainline has not benefited from government backing.

Trainline may see its share price hit in the long run if travel patterns change. Lockdowns are forcing many people to work from home, and some believe this will become a permanent trend.

It has been shown now that people don’t need to be in an office to do their job. It seems ever more likely that even when lockdowns end, many more people will be working from home. For many commuters, particularly those traveling into London in the South East, this means less train travel. Less train travel means fewer bookings through Trainline.

The Trainline share price may be down today because of the dilution impact of its new convertible bond, but its problems are far more fundamental. Personally I struggle to see much to be positive about for the company right now.

The post Why is the Trainline share price down 7% today? appeared first on The Motley Fool UK.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What I consider to be the ‘best shares’

To clarify, exactly what constitutes the ‘best shares’ of 2021 is subjective. Here I don’t name the two stocks I think may have the largest overall growth. Personally, I think the coming year is just too risky for that.

For my own criteria, I always prefer investments that pay out dividends as well capital gains. That said, I am looking for a decent returns of course. In these uncertain times the best shares for me are those I think will minimise risk, while maximising potential gains.

BP

With the market the way it is, BP (LSE: BP) is my number one choice right now. I believe it has been undervalued because of last year’s low oil prices, but this could be set to change.

The crude market was already in a precarious position when Covid-19 hit. A large amount of overcapacity had oil prices on the precipice of collapsing. When the coronavirus took over the world, it was the last straw for crude.

However, as the vaccines starts to reduce Covid-19 fears through 2021, oil should benefit. In addition, the world’s great oil producers (OPEC and Russia particularly) are likely to cut production to bolster prices. Just today, Saudi Arabia announced its intention to do just that.

With its price this low, BP is currently yielding a dividend of about 8%. For me this is too good to turn down, and makes it one of my best shares for 2021.

AstraZeneca

The second of my best shares for 2021 is the pharmaceutical giant AstraZeneca (LSE: AZN). Naturally, this is linked to the Covid-19 vaccine, but only slightly.

AstraZeneca is not making any profits from its vaccine directly, so the impact on the bottom line will be negligible — at first. However, it does seem ever more likely that a vaccination programme will continue for a long time. In this case, AstraZeneca should benefit for years to come.

Similarly, the problems of Covid-19 are likely to bring greater attention to pandemic prevention and vaccination programmes. I think the pharmaceutical industry as a whole will benefit in 2021.

I have one major caveat for AstraZeneca though – the risk of the vaccine programme going wrong. While vaccines are being produced and distributed on schedule, everything will be fine. Given the complexities of this situation, it is not impossible some things could go wrong with the vaccination programme. If that were to happen, I think fear would weigh on Astra’s price.

Despite this risk, I think AstraZeneca is still a solid choice as a long-term investment. I believe its price is cheaper today than it will be in the months to come, making it the second of what I consider the best shares for 2021.

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Karl has shares in BP and AstraZeneca. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

My criteria for my top 2021 picks

Firstly, it is worth considering my criteria when choosing the top dividend shares for 2021. I pick companies that I think will pay out consistently, with likely annual dividend growth. I look for stocks that have solid financials so as not to lose my initial capital.

In terms of yield, there will be higher numbers out there, but I want payouts that I think are the least risky. For me, a yield below 4% is not worth it, and anything over 6% needs questions to be asked about why it is so high. So here are my three favourites.

BAE Systems

BAE Systems (LSE: BA) has actually been one of my top dividend shares for the last few years, not just for 2021. This is with good reason — it is a solid performer in a solid sector. Currently offering a yield of about 4.5%, it is not the highest dividend on my list, but perhaps one of the safest.

Recently, the UK government confirmed plans to increase defence spending, which BAE will undoubtedly benefit from. The company’s accounts will also be bolstered after the German government’s confirmation that it will be buying 38 Eurofighters. I think this dividend is safe for some years to come.

BP

As with BAE, BP (LSE: BP) has long been one of my top dividend shares. But last year the company cut its dividend, as Covid and low oil prices weighed on its finances. This low price is what makes it one of my top picks for 2021.

Even with the lower payout, it currently has a yield of about 8%. This is mainly due to its low share price. The price, I believe, should see some recovery this year as the oil market stabilises. This means now may be the perfect time to lock-in this high yield.

It is true that crude has some fundamental weaknesses right now, but the concerns surrounding Covid should hopefully abate in the latter half of the year as vaccines reach most of the population. I think even a small recovery in oil prices will help the BP share price bounce back.

GlaxoSmithKline

Last but not least is the pharmaceutical giant GlaxoSmithKline (LSE: GSK). Though most of the buzz surrounding pharma right now concerns the Covid vaccine, this is not directly why GSK is one of my top dividend shares for 2021.

I do think in the long run, however, most of the pharmaceutical industry will benefit from the current drugs focus at government level. There is almost certainly going to be increased interest in, and government backing for, pandemic research and vaccines. It is also not unforeseen that a regular jab may be needed for Covid in the future.

Though some other firms may be better situated to benefit from this in terms of growth, with a current yield of 5.6%, GSK is a clear choice of the dividend shares in this sector, I feel.

The post My 3 top dividend shares for 2021 appeared first on The Motley Fool UK.

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Karl has shares in BAE Systems and BP. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.