Dividend stocks provide me with regular, but not guaranteed, portfolio income. For the foreseeable future, I will be reinvesting dividends to grow my portfolio by taking advantage of the power of compounding.
Safety first
The recent price action in the UK markets has increased the yield of many shares. But it would be folly to assume a high yield is a safe one. Dividend yields are calculated using historical or forecasted numbers; thus, there are no guarantees.
However, it is possible to at least classify a dividend as relatively safe compared to others. So, I screened the markets, looking for the safest dividend stocks. My screening criteria were as follows:
- The company must have paid a dividend in each of the last 10 years;
- The dividend cover must be greater than two;
- Dividends must have grown by at least 2% per year on average over the previous 10 years;
- The dividend yield should be greater than 5%.
From the list, I selected my top five dividend stocks for October 2022
Three of the stocks, IG Group, Investec and 3i, are from the financials sector. IG Group is a financial technology company best known for its trading platforms used by retail and professional investors alike. It has a forecasted dividend yield of 6.3%, which should be covered at least twice by earnings. Investec has a predicted yield of 8.4% with a cover of 2.1 and is an international bank and wealth manager. Then there is 3i, a private equity and infrastructure investment company. It has a forecasted yield and coverage of 5.1% and 6.3 respectively.
My top dividend stocks
| Company Name | Ticker | Sector | Market Capitalisation | Dividend yield (Rolling 2y) | Dividend Cover (Rolling 2y) | Dividend CAGR |
| Mondi | MNDI | Basic materials | £6.8bn | 5.25% | 2.61 | 8.82% |
| IG Group | IGG | Financials | £3.2bn | 6.25% | 2.06 | 8.60% |
| Investec | INVP | Financials | £3.4bn | 8.42% | 2.14 | 3.43% |
| Redde Northgate | REDD | Industrial | £699m | 7.50% | 2.05 | 22.61% |
| 3i | III | Financials | £10.9bn | 5.14% | 6.26 | 17.74% |
Mondi manufactures paper and packaging solutions for industrial and consumer-focused companies. Its forecasted yield is 5.3%, with a coverage of 2.6. Finally, Redde Northgate provides vehicle fleet rental and management services, motor legal services, and electric vehicle charging equipment supply and installation. Its forecasted yield and cover are 7.5% and 2.1 times, respectively.
Risk and track records
All investments carry risk. Investec is vulnerable to seeing clients pull funds if the global markets continue to wobble. The loss of fees could put dividends at risk. In adverse market conditions, IG Group might struggle to recruit new clients and convince existing ones to trade, hurting commissions. Mondi would be hurt by a slowdown in consumer spending, and Redde Northgate by a fall in business confidence. 3i replies on its extensive portfolio of private businesses for cashflows. I see a lot of consumer-facing businesses in there, so a recession would hurt them and, by extension, 3i.
However, all these stocks have paid a dividend in each of the last 10 years, including some tough times. That track record gives me confidence they would be able to find their way through troubled waters again. Thus, I would be happy to buy them this October and hold them in my Stocks and Shares ISA for their dividends for years to come.