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Investing for income in today’s market

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Investing for income has long been one of my main aims for my own portfolio. Dividend shares do not mean there is no growth potential of course, but income is the prime concern. 2020 has generally been a bad year for dividends, but things are starting to look up.

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My criteria when investing for income

Personally, I have a few rules that I always consider when investing for income. These rules are never more important than in uncertain times. The first of these is safety for my initial capital.

This is easier said than done, of course, but when investing for income I do not want to have to worry about losing a large chunk of my cash. To mitigate the risks, I usually look at larger, blue chip stocks. The FTSE 100 is a natural starting point.

I also want companies that have strong, well-established brands. I want firms with solid financials, generally meaning year-on-year revenue and profit growth over about five years.

As with most share investing, my time frame for holding the stock, even for income, is at least five years. This helps mitigate the natural price fluctuations and allows a company’s true strength to come through.

Yield and growth

Naturally when investing for income, the dividend yield is a key component, but the number alone is not enough. As dividends are paid on a pence per share basis, yield can fluctuate a lot. This means there can be great opportunities when a share price is low, to ‘lock in’ a higher yield than normal.

These kinds of share price drops happen all the time. The trick is knowing when they are fundamental, and when it is merely expectations or fear running away with sellers. Of course the opposite is also true. A good dividend share may not be worth picking up when its share price is high, because the yield will not be worth it.

Another of my main criteria is dividend growth. As well as seeing profits and revenue climbing annually, when investing for income I want to see a company consistently increase its dividend payout each year. Preferably this should be above 2%, to make up for inflation.

Tied in with this, I look for consistent dividend payments. This means a steady stream of dividends over the last five years. 2020 has put a dint in this pattern for many stocks now, so in future I will take this year into consideration. Generally though, those companies that have paid regularly and well in the past should do so in the future.

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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.

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