Dividend stocks can be an excellent way to earn regular income from investments. But what is a good dividend yield and where can I find reliable passive income?
The FTSE 100 currently yields around 4%. Before 2022, I’d have said that’s not too bad. But with UK inflation approaching double-digits, and interest rates climbing, I’d want to earn much more now.
And it looks like I’m spoilt for choice. So many shares are currently yielding over 7%. That’s enough to earn £7,000 on a £100,000 investment pot. It doesn’t quite keep up with soaring prices, but it’s close.
Also, in addition to receiving dividends, I’d expect my dividend stocks to rise in value over time. Together, I reckon I could achieve at least a 10% annual return.
Ignoring market wobbles
Bear in mind that even dividend stocks can fall in value. Especially in the short term. The stock market is particularly volatile right now, and many shares have fallen this year.
That said, as a long-term investor I can ignore the daily ups and downs of share prices. In the short term, stock prices tend to move around based on technical factors, news flow, and market sentiment. But the value of fundamentally strong companies should shine through in the long run.
Quality dividend stocks
What makes a reliable dividend share? First, I’d look for a solid track record. Companies that have been distributing dividends for decades are more likely to continue to do so, in my opinion.
It’s not guaranteed, as a shift in future earnings could alter a company’s ability to pay. But some companies have established dividend policies that they intend to continue.
That said, I’d still want to check if they can afford to distribute the cash from their earnings. To do so, I’d like to see dividend cover of at least one. That would mean the dividend is covered by current earnings.
Which dividend stocks?
First on my list of stocks to buy is life insurance business Legal & General. It currently offers a 7% dividend and it has been a regular payer for over three decades. Also, it can comfortably afford to pay, with dividend cover of 1.7.
Historically, Legal & General shares have performed reasonably well too. Over the past 10 years, it has achieved an 11% annual return including dividends.
Looking ahead, life insurance businesses including this one should benefit from rising interest rates. And L&G’s CEO agrees too, commenting that “we are beneficiaries of rates rising across the world.” That’s because it has to set aside less capital now to make future pension payments.
I’d also consider pensions specialist, Phoenix Group. It offers an 8% dividend yield, has dividend cover of 1.8x and has reliably paid out cash for the past 13 years.
Lastly, I’d buy Taylor Wimpey. Many UK housebuilders are highly cash-generative businesses, and Taylor Wimpey is no exception. It offers a 9% dividend, with dividend cover of 1.8x and an 11-year back-to-back dividend history.
Bear in mind that higher interest rates could slow the housing market. But with unemployment at the lowest level since 1974, any slowdown is likely to be minimal, in my opinion.