The stock market crash has taken its toll on share prices across the board. Dividend yields have risen sharply as a result. As I write, 13 FTSE 100 stocks have a dividend yield north of 10%. If I invest at today’s share prices, the dividend income from these sounds like a bonanza. But here’s the rub. It would be a great time to invest in stocks that generate a high passive income only if we can be sure that the dividends will be sustained.
FTSE 100 stocks’ dividend history
The stock market crash and the underlying economic slump suggest that they won’t. Some FTSE 100 companies have already announced dividend cuts and I suspect more could follow. In this scenario, I think it’s more important than ever before to make careful judgments of which dividend stocks we buy. In fact, a lower but safer dividend yield is preferable to a higher one that is likely to be cut.
I’d ideally invest in FTSE 100 stocks that have a long history of paying dividends. Their dividends might be reduced, but chances are, that they won’t be stopped altogether. In which case, at least the investment won’t be a total loss at any stage. One example of this is the FTSE 100 insurance giant Aviva, which has a history of paying dividends even during recessions.
Considering other macro factors
But a long history of dividends isn’t my only investing gauge because there’s more that’s going on in the global economy than the coronavirus crisis. Consider oil prices, which have fallen to multi-year lows. Even before Covid-19 hit, 2020 had begun on an unstable note for crude oil with tensions between the US and Iran. More recently, a disagreement between Saudi Arabia and Russia destabilised it even more. Yesterday, Brent crude hit an 18-year low of $23.5.
This has a bearing on FTSE 100 oil stocks like BP. Not only is oil demand expected to be weak, oil prices have plunged in an unexpectedly big way too. This weakens its position. At any other time, I would’ve been more confident of the stock, especially since I’ve invested in it. But now I’d watch developments carefully in the coming days before considering buying more.
Investment strategies beyond dividends
I also think it’s a good time to buy growth stocks. There’s a plethora of defensive stocks that look most attractive to me right now. These include the FTSE 100 analytics provider RELX, as an example, which I talk about in more detail in another article today.
Also, if we can gather the nerve, I expect carefully selected contrarian buys right now can be profitable in the long term. For example, I’ve long liked the FTSE 100 property portal Rightmove. It operates in a cyclical industry, which makes it vulnerable to business cycles. But the future of the marketplace is online. This means that over time demand for RMV’s services will only rise, even if the increase is in cycles.
Even if it sounds risky, considering diversifying into varied investment styles may be the best bet in these trying times.
Manika Premsingh owns shares of BP. The Motley Fool UK has recommended RELX and Rightmove. 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.