In a high-inflation world with interest rates still at relatively low levels, having excess cash in my bank account isn’t a smart move. The erosion of my purchasing power over the course of this year could be a problem. One option I’m using to counterbalance this is buying top income shares. Here’s why.
The benefit of high dividend yields
Each stock has a dividend yield. The calculation compares the current share price to the latest dividend per share payment. Clearly, if no dividend is paid, the yield is 0%. The higher the yield, the more likely the company is of interest to me as a top income share.
High yields allow me to really squeeze the most out of a dividend stock. It means I’m getting a lot of value out of my investment, whether it’s due to the share price being low, or the dividend per share being high.
As a risk though, a very high dividend yield can ring alarm bells. If I’m seeing a yield in double-digits (and especially 20% or more), chances are the share price is tumbling for the wrong reasons. The dividend could be cut in the near future due to stock-specific issues. Therefore, I need to be careful and understand that there’s a difference between a high yield and an unsustainably high yield!
Targeting a 9% dividend yield
I don’t think it’s unachievable to try and get a 10%+ dividend yield from top income shares, however. I’d stick to FTSE 100 and FTSE 250 companies to try and reduce my risk. And I’d try and cut my risk further by buying multiple stocks. In this way, even if one stops paying out income, it’s not game over for me.
At the moment, I’d buy financial income shares including M&G and Jupiter Fund Management. I’d also include some property companies such as Persimmon and Hammerson. My final additions would be miners Centamin and Rio Tinto.
If I put together the yields of all those income shares, I’ll be averaging 10.6%. I think this is an exceptional combination of stocks given their current payouts. Of course, I can increase this figure if I include other, higher-yielding companies. However, as mentioned above, I want to target sustainable income for years to come.
Income share risks
In theory, if the above stocks continue to pay out the same levels of dividends going forward, I’ll achieve my aim of a yield above 10%. Apart from the risk of a company cutting the dividend, the other risk I need to monitor is share price movements. If I come to sell a stock and the share price has fallen by a certain percentage over the holding period, it could wipe out some (if not all) of my income profits. If this is the case, I’d prefer to hold on to the share until I see some kind of recovery.
That recovery may never come, of course. And that’s why I’ve chosen those FTSE 100 and 250 stocks. Although there’s no guarantee of their ongoing success, I feel confident in the choices I’ve mentioned here. I’m considering adding all of my picks to my portfolio.