Planning ahead is something I’m terrible at when it comes to holidays. But I’m good at it when it comes to thinking about where I could park my money. Maybe it’s because one involves spending money, the other involves investing it! Either way, I’ve been making a list of dividend stocks that I think could be good buys over the coming months to set me up for 2023.
Picking some money managers
When I’m looking at the current dividend yield of a stock, I have to understand why the yield is attractive. For a lot of stocks in the investment management space, yields have shot up due to the share prices falling. Simply put, the dividend per share might have stayed largely unchanged, but if the share price has fallen then this will have increased the dividend yield.
Firms in this space have suffered due to the market volatility and uncertainty that has been evident for much of this year. This mostly translates to lower returns, and lower assets under management. Both factors hurt the profitability of the company.
I don’t know what 2023 holds in terms of market disruption. But I do think that lessons will have been learnt quickly, leading to better ideas and strategy for next year. Further, buying now allows me to pick up shares at a discount, rather than at high levels.
Some examples I like (with the yield in brackets) are Ninety One (8.12%), Ashmore Group (8.87%), and Quilter (5.92%).
Dividend stocks from the property space
Another area of interest to me for 2023 is property. It’s a classic cyclical sector, that underperforms during an economic downturn but then jumps up when times are good. Due to everything from high interest rates hurting mortgages to cladding scandals, it has been a tough year for the sector.
This has helped to push stocks related to the area down in recent months. In turn, the dividend yield has risen. But if the sector is in the trough right now, what about future dividends? I’m not too worried about income being cut. The main reason for this is that homebuilders have good finances.
For example, Taylor Wimpey had an operating profit margin of 19.3% in 2021 and a cash conversion rate of 69.7%. Like other builders, it carries a strong forward order book. Although this doesn’t guarantee future revenue, it certainly provides me with a clear year-ahead vision that demand for housing is still there.
On that basis, I’ve put Taylor Wimpey (10.46%) and Barratt Developments (10.80%) on my watchlist.
Cautious on the risks
The big risk to my view is that both sectors continue to underperform. I’m not overly worried about share price movements, as my focus is on passive income. But if the companies struggle to the extent that the dividend has to be reduced, it will hurt. I’m also going for high dividend yield stocks, which carries with it a larger risk than more sustainable (but lower-yielding) options.
By owning five stocks, I hope to reduce some of this stock-specific risk. That’s why I’m aiming to buy all stocks around the same time before year-end. If my thinking is correct, I could be in store for chunky income for the future.