When we say “best stock dividends”, our minds usually think of the yield. This makes sense; it is the return on our investment after all. However, making sure that we pick quality dividend shares can be more important than yield alone. For most of us it wouldn’t matter if a share has a high yield if it only pays it out once.
Here are some of my main considerations when choosing shares for quality income.
The best stock dividends are paid consistently
This is my number one priority when looking for a long-term income shares. The best stock dividends are those that are most secure. This means the company has a strong and consistent history of paying them out.
It also goes beyond regularity. Ideally we would see a company increasing its payouts each year. This is called dividend growth, and is required to at least keep up with inflation.
If a company is doing well, we can expect its share price to be climbing. This means without dividend growth, the same cash payout would be a lower yield each year. To maintain its percentage payout, it needs its dividend (in pence) to climb as well.
A company should be able to afford dividends in the first place
This is my second criterion for choosing income shares. The best dividend stocks are those from companies with good finances. This may sound obvious, but it is often far from it.
Stock dividends are a massive draw for investors. There are even models that value shares based on their payouts. This can lead to some companies offering dividends to entice investors, even when their finances do not warrant it.
It is often a more sensible strategy for a company to reinvest its profits rather than distribute money to shareholders. For this reason, I look for companies with solid earnings numbers for many years.
For me, this usually means looking at the larger, blue-chip companies of the FTSE 100. This has the added benefit of limiting the downside risk of losses to my capital.
If I am investing for income, I do not want my initial investment depreciating. Ideally it would increase over the years. Large, well established companies with solid brands are almost always less risky.
I started by saying the best stock dividends are more than just yields. This is true, but it is not to say yields are irrelevant. With the first two criteria in mind, I then look for the right payout.
This usually takes two routes for me. As a general rule, I think of the Goldilocks zone — about 4%–6%. Anything less than this and I don’t feel it pays enough. Anything more than this and it is perhaps paying too much… usually.
However as yields are determined by share price as well as the dividend, opportunities can be found. When share prices dip in the short run, higher yields can be locked in.
As long as the share price drop is through nothing fundamental (which is where good investment advice comes in), it can be a great opportunity. Personally I have locked in yields above 8% many times.
When looking at income shares, always keep this thought in mind:
There is more to consider for the best stock dividends than yield alone.
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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.