Why I’d buy dividend shares with more than just high yields in this stock market recovery

Dividend shares that offer a rising passive income, diversity and solid finances could be just as appealing as high-yielding stocks, in my view.

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.

When buying dividend shares to make a passive income, it’s always tempting to simply purchase the highest-yielding stocks around. While this can mean a generous income stream in the short run, it doesn’t necessarily produce growing and resilient dividends over the long run.

As such, it could be prudent to focus on more than just a company’s yield. Especially since the UK economy faces an uncertain future. By analysing its financial position, diversity and profit potential, it may be possible to build an income portfolio that offers a generous return with less risk.

Considering risk when buying dividend shares

Clearly, it’s never possible to eliminate risk when buying dividend shares. There’s always an ongoing threat that a company will run into financial trouble. Or it could change its strategy. Either could lead to a lack of dividend payouts.

However, this risk can be reduced through analysing a company’s financial position. For example, a business that has a solid balance sheet and strong cash flow may be more likely to maintain dividend payouts in a tough period. By contrast, a company with large debts and weak cash flow may resort to cutting dividends when operating conditions are challenging.

Furthermore, dividend shares that operate in a wide range of regions and markets may offer less risk than their peers. They may be less susceptible to an economic slowdown than their sector peers. They may also be more flexible in changing their business models to adapt to evolving customer tastes. This point may be especially relevant in today’s operating environment. Certainly when many consumers are changing their shopping preferences.

Dividend growth opportunities

A high yield that doesn’t grow may also become less appealing over the long run. As such, buying dividend shares with the capacity to raise their shareholder payouts at a faster rate than inflation may be relatively appealing. With monetary policy across the world currently being loose, this point may become increasingly pertinent should there be an increase in the rate of inflation.

Of course, identifying dividend growth shares can be tough. It relies on a judgment from an investor as to whether a business can raise its profitability to be able to afford a higher shareholder payout.

Analysing specific industries and learning which companies may have a competitive advantage is important. By doing so, it may be possible to unearth stocks that offer the greatest chance of higher dividends in the long run.

Building a resilient passive income

Although dividend shares can offer a resilient passive income, some companies will inevitably fail to make their shareholder payouts at times. Therefore, it’s always important to diversify among a range of companies and sectors when building an income portfolio. Doing so could lead to a more resilient and robust passive income in the long term.

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

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

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 »