Dividend shares are what I call compounding machines. When I receive a dividend, I can immediately reinvest it to buy more shares. These additional shares can pay dividends in the future, and the cycle continues.
Renowned investor Warren Buffett once remarked, “My wealth has come from a combination of living in America, some lucky genes, and compound interest”. This compound interest would have come from reinvesting dividends.
Dividends can make a huge difference to total returns over time. For example, £10,000 invested in the FTSE 100 in 2010 more than doubled to £20,400 by 2020 with dividends included. However, excluding dividends the total pot grew to just under £14,000. That’s quite a difference.
What I’d look for
The average FTSE 100 dividend yield is currently 3.5%. But there are several stocks that offer a much more lucrative passive income. When I’m looking for dividend shares, I try not to look at companies that offer over 10%. These much higher yields can be tempting but I’d be wary. Particularly high dividends can be at risk of being cut. In my experience, dividend yields greater than 9% or 10% aren’t the most reliable. So for me, the sweet spot is to look in the 6%-7% range. There are several companies that meet this criteria right now and I’m considering them for my 2022 Stocks and Shares ISA.
Which dividend shares?
The top dividend shares I’d consider for 2022 includes Jupiter Fund Management, Vodafone Group, and Legal & General. Each of these three FTSE 350 companies currently offers a dividend yield between 6% and 7.2%. In addition, Vodafone and Legal & General have been paying regular dividends for almost three decades. That’s an impressive track record, which gives me some comfort that they can continue to reliably pay dividends over the coming years. That said, there are no guarantees. These companies will need to ensure their earnings continue to grow. There are also market factors that may not be in their control.
A balancing act
These three companies are quite different to many of the other shares I hold. For instance, I own plenty of growth shares in my Stocks and Shares ISA, many of which don’t pay any dividends at all. But that doesn’t concern me. I buy them for their growth potential, not for any income they distribute to shareholders. That said, I like to have some balance in my portfolio. In addition to diversifying across a variety of growth stocks, I also like to buy and hold a selection of dividend shares.
Best of both worlds
One company that offers growth potential and a decent dividend is housebuilder Persimmon. This is a high-quality share in my opinion. Not only does it steadily grow its earnings, but it offers an 8.5% dividend yield. With a price-to-earnings-ratio (P/E) of just 10 I’d say it’s also reasonably cheap. I’d need to keep an eye on rising interest rates as that is a risk for the sector, but overall, I’d buy this share.