How I’m looking for dividends in a market with very few

Now might not seem the best time for income investing, but choosing the right shares today can lock in dividends for the future.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Now does not seem like the best time for income investing. Many major stocks that previously paid out good dividends have cut or postponed them. Indeed, in my own portfolio, my best dividend plays have all dried up. However times like these can actually be a great opportunity. This is what I’m looking for.

Not all gone

Firstly it’s worth noting that not all shares have stopped paying dividends. There are still a number of potential plays out there that can bring in decent yields.

Of course, times are still very uncertain. A second lockdown seems to be looming. Covid shows no signs of slowing down, and a recession seems ever more likely. Those stocks paying dividends today may still have to cut them tomorrow.

But even considering this, there is a way forward, I feel.

Look to past dividends for the future outlook

The basic premise I now follow for finding dividends is looking at firms that consistently paid good yields in the past.

I understand having to suspend dividends in times of trouble. In fact I almost always agree with the decision. As a long-term investor, I am glad to see management redirecting money into their businesses rather than keeping investors happy with dividends.

Times may be bad now, but eventually things will get back to normal. When they do, those solid companies that paid dividends before will pay them again. What is even better, locking in those shares now when prices are under pressure, should mean the relative yield we get when dividends come back will be even better.

Criteria to look for

So here are a number of criteria I look for. Firstly, I am looking at blue-chips with strong brands. Preferably companies that don’t seem to have too much trouble on the horizon.

Short-term problems like low oil prices or bad loan provisions don’t bother me. These will see improvements eventually. But companies that may not survive a fundamental shift in their market, such as customers moving to online rivals, are perhaps ones to be avoided.

Next, I am looking for shares that paid out dividends consistently in the past. The best guarantee of picking a future dividend stock that isn’t paying dividends at the moment seems, to me, to pick one that has almost always paid them in the past!

A quick look at a company’s payment history shows this. What’s more, I would be looking for decent dividend growth year-on-year in the past. Anything over 2% or 3% seems about right.

Lastly, I would be looking for previous yields in what I think of as the ‘Goldilocks zone’. This is between 4% and 6% yields as a general rule, though I have picked up oversold shares with dividends higher than 6% many times. Anything less isn’t worth it, anything higher is probably too much to sustain.

It may not seem like the best time to find dividends right now. But with prices under pressure, we may in fact have a great opportunity to lock in strong yields when everything gets back to normal.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »