I’m searching for dividend shares to buy. But what do I mean by ‘no-brainer’? I want to narrow down my buying possibilities without having to think too hard. The simplest way might be to just choose the five biggest dividend yields in the FTSE 100.
But some of those are not well covered by earnings, and their track records are weak. So how else might I construct a no-brainer filter that could highlight the best dividends while reducing risk? Here’s what I tried.
I started with the 20 companies in the FTSE 100 with the biggest ordinary dividend yields. I went for historic yields, as they are already proven. Forecasts are useful too, but they’re obviously more risky. I calculated the yields using recent share prices, in case any have moved enough since year-end to significantly alter their valuations.
Dividend shares filter
Ranking them by dividend yield, I then went down the list and eliminated any whose 2021 dividend was not covered by earnings. I also eliminated sector duplicates, because with only five shares I would want maximum diversification.
I stopped when I’d found five shares that matched these criteria, and here’s what I ended up with:
| Company | Dividend yield | Dividend cover |
| Rio Tinto | 11.7% | 1.7x |
| Taylor Wimpey | 6.7% | 1.8x |
| Imperial Brands | 7.4% | 2.2x |
| Legal & General | 7.2% | 1.9x |
| Vodafone | 6.0% | 1.2x |
That’s an interesting selection of dividend shares, picked without any delving into the companies themselves.
Now, that’s not the way I would really invest. But I think it’s a promising start. Next, I would examine them individually to decide which to buy.
Of that list, I have reservations about Rio Tinto. The mining sector is notoriously cyclical. And any weakening of demand, especially in China, could damage the prospects for future dividends. In fact, Rio has cut its dividend twice in the last 10 years.
I don’t like debt
I’m wary of Vodafone too, for a couple of reasons. One is that the dividend is covered only weakly by earnings. And Vodafone carries big debts. Net debt stood at €41.6bn at 31 March.
The other three are dividend shares that I would definitely buy, though none is without risk.
Taylor Wimpey, like other housebuilders, could come under pressure should the property market slip. But there’s a big shortage of homes in the UK. And I can only see that helping generate attractive dividends in the coming years.
Imperial Brands faces a long-term threat to the tobacco business. But the demise of that industry has been called for years, yet still the cash is rolling in.
Economic shock
And then with Legal & General, we’re up against economic dangers that so often hit the financial sector first. Against that, I have almost always held an insurance stock. Over decades, it’s been a very profitable sector for cash generation.
I do wonder how well I’d do if I bought all five of these dividend shares without doing any extra homework. I suspect the selection would actually net me a healthy long-term passive income stream.