March sees the arrival of spring, hopefully bringing better weather with it. But one point that I need to be aware of as an investor is several meetings of the Bank of England Monetary Policy Committee. Some banks are forecasting the interest rate will be increased again this spring. Yet with another hike potentially taking the base rate to only 0.75%, I still think I can find better places for my cash than a savings account. One idea is investing in top dividend stocks.
Understanding dividend yields
Top dividend stocks aren’t necessarily just those that have the highest dividend yields. For example, Polymetal International has a yield of over 28% currently, with Evraz at a staggering 74%! The reason these yields are so high is because the share prices are falling. Even though the dividend per share hasn’t changed yet, it could be risky to buy these stocks at the moment. Issues relating to their exposure to Russia and Eastern Europe are concerning investors. If this impacts business, then the dividends per share might be reduced in coming months.
I have to remember that just because a yield is high, doesn’t always mean that it’s a safe option for me.Â
Oil shares in focus
From that angle, I think an area that looks attractive is oil and gas stocks. These companies are benefiting from higher prices in key commodities. This isn’t just over the past week, when Brent Crude hitting $100 per bbl caught a lot of headlines. Rather, oil has been pushing higher for the past six months. Gas prices have also been rallying.
As a result, companies such as Shell and BP could see profits increase over the course of the coming year. Their current dividend yields are 3.5% and 4.5%, respectively. Higher prices should help to increase the dividend payouts. Not only this, but excess retained earnings should be used to pay down debt levels, improve cash flow and other positive points. In turn, this helps to support a more efficient business doing even better in 2023 and beyond.
The risk here is if I believe that commodity prices are overinflated. After all, it was less than two years ago that the oil price actually went negative briefly during April 2020. I’m not saying this is likely to happen any time soon, but it shows that it can be volatile and unpredictable. This can make dividend stocks tied to oil very high risk.
More top dividend stocks
Another area I like at the moment is insurance. Providers including Aviva and Legal & General (both yielding above 5%), I think, are well placed to take advantage of life getting back to normal. For example, consider car insurance from Aviva. More people are likely to be back on the road this year versus the lockdown-hit 2020 and 2021 periods. This should help to give rise to more policies being taken out.
I think the same applies for pension products, with people more comfortable with increasing payments to a pension now the future perhaps looks a little more certain.
In terms of risk, indirectly these dividend stocks are tied in some way to the fate of the stock market via pension funds. So a volatile market (as we’re seeing at the moment), could hamper performance.