Putting the money to work

With £10k in savings, it provides a good initial pot of cash to put to work. To begin with, I’d look at what yield the investor is trying to target. After all, the £10k is likely only earning 2%-3% annual interest in a regular savings account. Therefore, the added risk of buying stocks (where the capital can fluctuate in value every day) must be offset by a higher reward.

The average dividend yield of the FTSE 100 is 2.99% so I don’t think it makes sense to invest in a tracker. Instead, an investor could actively pick a selection of stocks in the 6%-8% range. The potential income is high enough to warrant withdrawing funds from savings and investing them in the market.

The next factor is assessing how long it could take to reach the goal of £455 a month in dividends. If only the initial £10k were used and no further money were injected, it could take 30 years, with an average yield of 7%. That’s a long time! However, if an investor could supplement the lump sum with £250 each month, it could take just under 12 years.

Of course, there’s no guarantee on these timeframes. The hot income stock of today could struggle years down the line, cutting the dividend. That’s why it’s good to have a diversified portfolio, so at least if this does happen, the impact can be manageable.

Boosting dividend payments

Actively picking good dividend shares in the 6%-8% yield range needs some research. One example to consider that I’ve researched is Chesnara (LSE:CSN). It has a current dividend yield of 7.2%, with the share price up 30% in the last year.

The FTSE 250 company isn’t the most traditional insurance and pensions firm, as it focuses on buying and managing existing life insurance and pension policies. It earns fees from administering these policies and profits from managing the investments backing them.

Its CEO said in the interim results in August that it saw “cash generation up 26%, an increase in our solvency ratio and a further 3% increase in the interim dividend”. Further, in December, it got regulatory approval for the takeover of HSBC’s UK life insurance division. This has boosted investor sentiment already, but could help even further as more details about the extra £4bn of assets under administration and 454,000 policies come through.

Against this backdrop, the dividend per share has been rising for several consecutive years. I can see this continuing based on the momentum from last year. However, one risk is that the stock market underperforms this year, leading to volatility in the assets Chesnara manages. This could not only hurt earnings but also cause reputational damage for clients who have their money with the firm.

Overall though, I think it’s a good stock for investors to consider as part of an overall strategy.

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Long-term office deals

First, let’s consider Derwent London (LSE:DLN). It’s a UK-listed real estate investment trust (REIT) specialising in commercial office property in central London. Interestingly, the company adopts a regeneration-led strategy. This means it acquires underutilised buildings and enhances their value through redevelopment and refurbishment.

The current dividend yield is 4.9%, with 25 years of consecutive dividend growth. However, the 30% fall in the share price over the past year needs to be addressed. Part of this is due to weaker sentiment in the market, as hybrid working trends reduce demand for office space and undermine long-term lease renewals. It’s also to do with concerns that interest rates will stay higher for longer. Given the amount of debt the company needs to finance new projects, it’ll increase overall costs going forward.

Despite this, the track record of income shows me it’s a clear priority for the management team. As a REIT, it must pay out a large portion of its earnings as dividends to maintain favourable tax treatment. The dividend cover is 1.5, meaning that the current earnings per share more than covers the paid out dividend.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

At a business level, I see revenue from rental income increasing in the coming year as many firms pivot back to working from offices. It also benefits from its diversified, high-quality tenant base, which is unlikely to dramatically reduce occupancy suddenly.

A niche insurance operator

A second stock is Chesnara (LSE:CSN). The stock is up 23% over the last year, with a dividend yield of 7.82%. It has paid out a constant dividend for two decades.

The company is a life insurance and pensions consolidator. In simple terms, it buys and manages closed books of life insurance and pension policies from other insurers that no longer want to run them. By taking on these portfolios, Chesnara earns steady, predictable cash flows from the premiums and investment returns linked to those policies. This is one reason why it has been a reliable dividend payer for so long.

Going forward, I don’t see this changing. It’s true that growth is modest. But at the same time, the company prioritises paying out to shareholders. Evidence of this can be seen from the dividends that have been maintained or increased steadily over the years. In essence, Chesnara trades growth potential for income reliability, which is why many investors view it as a dependable dividend stock.

As a risk, the business needs to keep up with new acquisitions going forward. After all, it manages closed books, where the policies naturally end in the future, so without good new purchases, cash flows could gradually decline.

But I think both companies are worth considering for investors, with a strong track record of income generation.

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Its rise has been remarkable. On 7 April, Chesnara was valued at just £366m. Fast forward four months, and it’s almost doubled in size to a market-cap nearing £700m.

So what lit the fuse?

The spark came in early July when Chesnara announced a £260m cash deal to buy HSBC’s specialist life protection and investment bond provider. The acquisition will add around £4bn in assets under administration and 454,000 new policies, significantly boosting its scale in the UK.

Management expects the deal to generate £140m in cash during the first five years, with the potential to reach £800m over the long run. That’s a sizeable kicker for any business.

To fund it, Chesnara plans to raise £140m through share issuance — a move that may dilute shareholder value and dampen enthusiasm for new investors. Still, the bigger story for many will be its dividend plans. Management expects to raise its final dividend for 2025 and interim dividend for 2026 by an adjusted 6%. For income hunters, that’s tough to ignore.

A dividend machine?

Chesnara already offers a chunky trailing yield of 7.3%, with forecasts pointing towards a bumper 8.5%. That’s comfortably above the FTSE 250 average. But can it last?

One concern is the payout ratio, currently hovering around 950%. For most firms, that would be a huge red flag. Typically, a sustainable ratio sits below 100%. However, insurers play by slightly different rules. Volatile earnings, capital requirements and complex accounting can distort the numbers.

Legal & General, for instance, has often carried a high payout ratio but has managed to keep shareholders sweet for decades. Chesnara too has a stellar track record — it’s increased its dividend every year for over 20 years. That’s not something an investor should dismiss lightly.

Another eyebrow-raiser is valuation. Its trailing price-to-earnings (P/E) ratio stands at an eyewatering 131.5 — more befitting of a Silicon Valley tech stock than a UK insurer. But here’s the twist: analysts expect earnings to grow rapidly, bringing its forward P/E down to just 13.3. Suddenly, things don’t look quite so stretched.

Profitability however, still nags at me. With an operating margin of only 1.1% and a return on equity (ROE) of 1.16%, the business isn’t exactly overflowing with surplus cash.

That said, analysts remain bullish. The average 12-month price target sits at 319p — around 9.5% higher than today’s price. Out of five analysts covering the stock, four rate it a Strong Buy, while one prefers to Hold.

My take

The FTSE 250’s full of fascinating mid-caps that often fly under the radar, and Chesnara’s rapid ascent highlights how quickly fortunes can change. The HSBC deal could be a genuine game-changer, but it comes with risks — from share dilution to the challenge of integrating such a large book of business.

If the acquisition pays off and dividends keep climbing, it could prove a rewarding addition to a passive income portfolio. It’s not quite a screaming buy in my book — yet — but at this yield, it’s certainly worth serious consideration.

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Some of us never forgot them, mind. And three that I like the look of are due to report in September.

Cash cow #1

House builder Barratt Developments (LSE: BDEV) has full-year results due on 4 September. The share price is down over five years, which helps keep the forward dividend yield at a healthy 5.1%.

For long-term dividend income, I reckon this could be one of the more sustainable. And this yield is in a down year when the business is under pressure. Forecasts show earnings starting to grow again from 2025 onwards.

With the firm’s July trading update, the board said it “intends to declare an ordinary dividend in line with policy, with dividend cover of 1.75 times adjusted FY24 earnings per share“.

We’re not out of the woods, as many people have other costs on their minds. Energy prices are rising, and the humble British fish and chips dinner has gone through the roof.

But even with more short-term uncertainty, I think I’d buy now if I didn’t already own some house builder shares.

Cash cow #2

While eyes turn to finance stock yields, I think the 9.1% forecast for Chesnara (LSE: CSN) has dipped under the radar.

The life sssurance and pensions consolidator has seen its share price fall in the past couple of years.

It’s only a relatively small company, with a £400m market cap, in a big insurance sector. And that’s possibly the biggest risk. Smaller firms might not have the same resilience needed to handle any new downturn quite so well as larger peers.

I reckon that could keep investors away and focused more on big FTSE 100 stocks.

But at the time of FY 2023 results, Chesnara reported a rise in commercial cash generation to £53m, with strong solvency. CEO Steve Murray said “The two acquisitions we delivered in 2023 show we have continued momentum behind our acquisition strategy“.

The company lifted its dividend by 3%. First-half results are due on 10 September.

Cash cow #3

Over at PZ Cussons (LSE: PZC), we’re looking at a 5.1% forward dividend yield. The poor share price chart for the past five years has helped with that.

But if the full-year results due on 18 September are any good, I wonder if we might see the start of an upturn.

One problem is that Cussons has had a tough time in Nigeria, which made up more than a third of its 2023 revenue.

Still, in June’s trading update, the firm said it held minimal surplus cash in Nigeria. And we were reminded of the “plan to maximise shareholder value from a portfolio transformation, following a strategic review of brands and geographies.“

“An update will be provided when appropriate“, the board added.

The risk through uncertainty seems clear. But if Cussons can align itself with upbeat forecasts, we could see the stock valuation fall and the dividend cash grow.

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Of course, dividends are never guaranteed and stocks are no substitute for cash savings. But the income available from good quality dividend shares is generally much higher than from savings accounts. For me, that makes shares an attractive investment at the moment.

A defensive 6.8% yield

My first choice is British American Tobacco (LSE: BATS). This FTSE 100 tobacco group carries some ethical and regulatory risks, but I think that BATS’ increasing focus on lower-risk products such as vapes goes some way to reducing these concerns.

For now, the reality is that this business is one of the largest in the tobacco sector and enjoys stable profits and strong cash generation. British American generated £7.2bn of surplus cash in 2021, of which £4.9bn was returned to shareholders.

Fortunately, British American was also able to reduce its debt levels by around 10% last year. The group’s leverage has been a concern for me in the past, but I’m increasingly comfortable with the situation.

The BATS share price has risen by nearly 25% so far in 2022, but the stock still offers a generous 6.8% dividend yield. With the shares trading on less than 10 times forecast earnings, I’d be happy to add British Americanto my portfolio at current levels.

Dividend shares: a property pick

I’m a fan of using real estate investment trusts (REITs) to generate a property income from my share portfolio. One UK REIT I’ve been following for a while is NewRiver REIT (LSE: NRR).

NewRiver owns regional retail property around the UK. The company’s sites are typically local or regional retail parks, and shopping centres in small and mid-sized towns.

It’s been a difficult few years for the group. Even before the pandemic, conditions were tough for retail landlords. To add to NewRiver’s problems, it had too much debt, in my view.

CEO Allan Lockhart now seems to have pulled off a difficult turnaround. He’s sold a number of properties, cut debt, and restored the dividend. Occupancy in NewRiver’s remaining portfolio is over 95%, and new rental rates are rising.

NewRiver still has a few problem sites. But the shares offer a forecast yield of 7% and I believe the business is now on a sound footing. I’d be happy to buy this dividend share for extra income.

A safe 8% yield?

Insurer Chesnara (LSE: CSN) buys life insurance and pension policies from other companies, and runs them to maturity.

This specialist business model generates plenty of cash, most of which Chesnara returns to its shareholders. As a result, this insurer is currently one of the highest-yielding stocks on the London market, with a forecast yield of 8%.

One risk I can see is that Chesnara could gradually run out of new acquisition opportunities. The business might then go into decline unless management pursued a new strategy.

However, there’s no sign of this yet, and a 17-year track record of dividend growth gives me confidence in Chesnara’s experienced management. I own plenty of insurance stocks already, but if I was buying an insurer today, Chesnara would definitely be on my shortlist.

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Let’s take a look at a couple of great dividend shares that I’m considering right now. The average FTSE 100 dividend yield is currently 3.3%. Although a share yielding 3% can provide some extra passive income, there are several shares that offer much more. 

Dial-a-dividend

For instance, telecoms provider Vodafone (LSE:VOD) currently yields 5.5%. But the dividend yield isn’t the only factor I’d consider. I’d also look at how sustainable it is. Can it afford it? For Vodafone, I’m confident it has sufficient cash flow to sustain the current level of payout. That’s because its dividend cover ratio of 1.1 suggests that it’ll earn more in earnings than it needs to pay out in dividends. Secondly, Vodafone has regularly paid dividends for almost three decades. It has a subscription-based business model that provides consistent cash flow. Looking forward, new technologies including 5G and Mobile-Edge Computing could create additional growth opportunities.

Debt pile alert

A word of warning though. The company has a substantial debt pile that totalled €41bn (£34bn) last year. It could face higher finance costs if interest rates move higher over the coming months or years. That could reduce earnings and raise the chance of cutting its dividend. Overall, I reckon it has solid financials that can sustain its dividend, so I’d consider buying the shares for my Stocks and Shares ISA.

Little-known dividend shares

Some of the shares that I find are relatively unknown. But that’s ok. As long as they display the characteristics that I’m looking for, I really don’t mind if they aren’t household names. After all, as an investor, I just want to grow my investments. One little known dividend share that I’d buy right now is Chesnara (LSE:CSN). This mid-cap firm is in the business of managing life and pension policies. It stood out to me for three main reasons: it has an attractive dividend yield of 7.5%; it has 17 years of dividend history with consistent growth in cash payouts; and it has a proven successful track record of buying life and pensions businesses.

Risks and benefits

At a time when I’d expect the Bank of England to raise interest rates to tackle persistently high inflation, it’s great to find shares that could actually benefit. Higher interest rates should generally be positive for Chesnara. That said, there are still risks on the horizon. Sharp moves in currency and financial markets can raise its risk exposure. A large spike in the level of claims could also do the same.

Overall though, I like what I see and would happily buy. Dividend shares that consistently pay over 7% for so many years are rare. So when I find them, I’m inclined to snap them up pretty quickly.

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bAs such, I have been searching for inflation-busting dividend stocks to add to my portfolio. Here are three income stocks I would buy today, all of which yield between 7% and 9%. 

Leading dividend stocks 

Topping my list with the lowest dividend yield in the pack is the financial services firm Chesnara (LSE: CSN). This company manages books of life and pension policies, a relatively niche and specialist business model. 

The nature of the business means the enterprise has to take a long-term perspective when planning for investments. This approach has benefits and drawbacks.

On the positive side, the company has a relatively high level of confidence in its income projections for the foreseeable future. Cash flows from pension and life policies are somewhat predictable. 

On the other side of the equation, it has to be conservative when managing payouts to investors. The company cannot distribute too much money, or it may breach its regulatory requirements. 

At the time of writing, the stock supports a dividend yield of 7.7%. While the distribution is by no means guaranteed indefinitely, I think it looks desirable in the current interest rate environment. 

Market growth

Over the past couple of years, the wealth of the most affluent section of society has increased significantly. This suggests demand for wealth managers such as M&G (LSE: MNG) could increase as we advance. 

As one of the best-known wealth managers in Europe, the company has a solid competitive advantage. It is also boosting its footprint by acquiring smaller peers and is expanding into different sections of the market. Offering consumers various alternatives to the traditional wealth management service is another growth avenue the group is pursuing. 

One of the main challenges the business will face going forward is competition. It is not the only company in the space. Other wealth managers are also trying to expand their footprint and acquire more customers.

Despite this headwind, I would buy the company with its 8.4% yield for my portfolio of dividend stocks. 

Inflation-busting income

The final company I would buy for my portfolio of dividend stocks is the housebuilder Persimmon (LSE: PSN). 

Shares in this firm currently offer a dividend yield of 9.7%, at the time of writing. The yield has shot up after the government announced it would be seeking to recoup billions from developers to help deal with the cladding crisis. 

The financial fallout from this is possibly the most prominent risk hanging over the stock today.

However, there is also a significant tailwind driving the company forward. That is the structurally undersupplied UK housing market.

It seems likely that demand will continue to outpace supply in the housing market for the next three to five years, at least, suggesting Persimmon should be able to continue to find buyers for its new properties for the foreseeable future. 

With this tailwind, I think its dividend is here to stay. 

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Here are three dividend shares that I would buy today, all of which support dividend yields of 6%, or more. 

Office income

The first company I already own in my portfolio but would be happy to buy more of is the Regional REIT (LSE: RGL). With a dividend yield of 7%, at the time of writing, the stock offers an attractive level of income from a portfolio of properties around the UK.

The group focuses on acquiring properties outside the M25, predominantly offices with a diverse and financially stable customer list. The strategy has proven its worth over the past 24 months.

As other landlords have struggled to collect rent from tenants, Regional has managed to sail through the pandemic relatively unscathed. Of course, this does not mean the group is invincible. Rent collection levels may decline if the country enters a period of prolonged economic uncertainty. 

Still, I think the potential rewards of owning the shares far outweigh the risks. 

Renewable energy dividend shares

Bluefield Solar Income (LSE: BSIF) focuses on acquiring and managing UK-based renewable energy and storage projects.

This is a growing industry, and Bluefield is using its clout in the investment industry to expand into different sections of the market. It recently completed its maiden wind portfolio acquisition as well as two ready-to-build battery storage projects. 

Diversifying across the renewables sector makes a lot of sense. It should also help support the company’s dividend to investors. At the time of writing, the stock supports a dividend yield of 6%. The net asset value for the business is 117p compared to the current stock price of 120p.

Usually, I would avoid buying funds at a premium to net asset value but, on this occasion, I would be happy to pay a premium to purchase exposure to this fast-growing sector. 

Risks the firm may encounter as it advances include competition for assets, which could cause it to overpay. Rising interest rates may also raise the cost of its borrowing. 

Market consolidator 

The final company that could be an excellent fit for my portfolio of dividend shares is Chesnara (LSE: CSN). This business buys and manages books of pension policies from other fund managers and corporations. It is always looking for new deals to expand its footprint and bring economies of scale to the operation. 

When the company has acquired a business, it can use its size to push down costs and free up capital. Excess cash is then returned to investors. By using this approach, the firm can fund a hefty dividend to investors. At the time of writing, the stock yields just under 7%. 

Unfortunately, as pension management is a highly regulated business, this level of income is far from guaranteed. The company could be forced to reduce its dividend if regulators believe it is paying out more than it can afford. 

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High-dividend-yield opportunity

Chesnara is engaged in the management of life and pension books of business in the UK and Europe. The company acquires pension assets from other managers and then uses its size and experience to reduce costs and improve performance.

The end goal for management is to increase cash flow from the acquired books of business. The firm can then use this cash to fund further acquisitions and a dividend to investors. 

The group’s latest acquisition illustrates how the model works. Chesnara has acquired £2.9bn of assets under administration and approximately 80,000 policies from Sanlam Life & Pensions UK Limited, a specialist provider of insurance and long term savings products in the UK.

The organisation paid £39m in cash for the assets. However, management estimates that they have an economic value for the group of £48.1m. 

Based on this estimate, the company believes the assets provide “future material value creation potential from expense and capital synergies.” Better respected returns from investing the assets could enhance the overall value for the group. 

Chesnara believes there are plenty of sellers out there of these assets, which could provide a long runway for growth for the business. It could also support substantial dividend expansion in the years ahead. 

This is what I am really interested in. The company is highly cash generative, thanks to its unique business model and growing scale. It also has a track record of steady dividend increases. 

City analysts believe the company’s dividend yield will total 7.9% this year, based on an expected full-year payout growth rate of 3%.

Undervalued

As well as this attractive dividend yield, the stock is also trading at a historical P/E ratio of 6. It is incredibly rare to find a company with a dividend yield that exceeds its P/E multiple. This signifies to me that the stock is both a dividend champion and significantly undervalued. 

Based on these factors, I would buy the stock for my portfolio today.

However, Chesnara might not be suitable for all investors. Pension management can be a complex business. Even a slight change in interest rates can have a significant impact on managers’ calculations. A substantial stock market crash could also lead to disruption across the business. 

Further, the sector is highly regulated. Additional regulations could increase group costs and reduce the amount of cash available for distribution to investors.

I will be keeping an eye on these risks and challenges as we advance. 

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High-yield stocks to buy

The first stock on my list is Diversified Energy (LSE: DEC). Formerly known as Diversified Gas & Oil, the independent hydrocarbon production company has a strong dividend track record.

Last year, it paid out 15.3p per share, giving a dividend yield of 10.6% on the current share price. Analysts are expecting a distribution of 16.1p this year, which translates into a yield of 11.2%.

While there’s no guarantee the company will hit these targets, I’m encouraged by its low production costs and hedging programme. These reduce the risk that volatile oil and gas prices will force the firm to cut its distribution. For these reasons, I’d buy Diversified Energy for my portfolio of high yield income stocks today. 

Still, this investment might not be suitable for all, considering its environmental considerations. That’s probably the most significant challenge the enterprise will face going forward.

Booming market

Homebuilder Persimmon (LSE: PSN) has rapidly carved out a reputation as being an income stock over the past few years. 

Back in 2013, the company laid out a multi-year cash return plan, which it has consistently outperformed ever since. Given its strong cash generation, Persimmon recently hiked its return target once again. The stock is going to pay a special dividend of 110p in August, and 125p in July 2022.

These figures suggest those who buy the shares today will see a yield of 8% on their investment. This is why I’d buy the company for my portfolio of high-yield stocks today. 

That said, past performance should never be used to guide to future potential. There’s no guarantee the homebuilder will continue to pay special dividends to investors.

A drop in demand for new build properties, a fall in home prices, or an increase in interest rates are all risk factors that could jeopardise the firm’s cash return plans. 

Income generation

The final high-yield stock I’d buy today is Chesnara (LSE: CSN). With a dividend yield of 8.6%, at the time of writing, the stock immediately looks attractive. However, this yield says something. The firm’s balance sheet is complex, which may put some investors off.

Indeed, the firm manages books of pension and life insurance policies. These policies can be tricky to manage as even a slight increase in interest rates can raise liabilities substantially. This may lead to a dividend cut. 

This risk and level of uncertainty may put some investors off from owning the shares. However, I’m comfortable with this, which is why I’d buy Chesnara for my portfolio of high-yield stocks.

I believe this is also a growth industry as many companies are trying to get these liabilities off their balance sheets. Larger operators such as Chesnara can manage these policies more effectively and with lower costs. 

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