The volatility of meme stocks this year has meant that some investors have been buying and then selling shares over short periods. Although this can have some advantages, I much prefer to identify and buy stocks that I feel I can hold for years to come. So if I had a spare £3k at the moment to invest for income potential, these are the kinds of top dividend stocks that I’d buy.
Income stocks for a lifetime
But first, a note on why I like such stocks. I think it’s easier to find top dividend stocks that have a long life than growth stocks. With the latter, those that are hot right now might not be in five or 10 years’ time.
Dividend stocks might not be hot growth stars but I’m more focused on their income potential. Even if the company just maintains current levels of profitability in the future, it would suggest that I’ll still be picking up my dividends. Therefore, if I’m happy with the payout ratio and dividend policy currently, then it could be a company I could hold in my portfolio for many years to come.
Top dividend stocks can also help to protect me against inflation. UK inflation is currently above 5%, meaning that any cash I have is being eroded in value. If I can invest in the stocks with a dividend yield at or above 5%, I can help to offset some of the negative impact of current inflation.
However, the level of inflation changes month-by-month. So it doesn’t necessarily mean that the dividend yield will always be higher than the level of inflation. This is going to be a risk when considering which stocks to buy. Another risk is that if a business falls on hard times in years to come, one of the first things to be cut would be the dividend to allow the business to retain cash flow. Yet I remain a big dividend stocks fan.
Top stocks for the future
My £3k provides me with plenty of room to select a group of income stocks. I don’t want to dilute it too much, but would ideally buy between six and 12 shares with my money.
I’d group the stocks into different risk categories. I’d pick a few higher-risk names that currently have very attractive dividend yields. Examples include Rio Tinto and Imperial Brands. My thinking here is that even if the dividend payments get cut in the future (to help the firms invest in becoming more sustainable), the yield could still be higher than average.Â
In the middle risk category I’d add most of my money. This is the sweet spot, with some great companies with solid track records on paying out income. These would include Aviva and National Grid, with current yields just above 5%.
Finally, I’d include some top dividend stocks that I see as low-risk. This should help to counterbalance my high-yield picks. One option I’d consider here is J Sainsbury. But I have to remember than even low-risk doesn’t mean no-risk and supermarkets face intense competitive pressures.
I’m considering buying all the above mentioned stocks.