Now does not seem like the best time for income investing. Many major stocks that previously paid out good dividends have cut or postponed them. Indeed, in my own portfolio, my best dividend plays have all dried up. However times like these can actually be a great opportunity. This is what I’m looking for.
Not all gone
Firstly it’s worth noting that not all shares have stopped paying dividends. There are still a number of potential plays out there that can bring in decent yields.
Of course, times are still very uncertain. A second lockdown seems to be looming. Covid shows no signs of slowing down, and a recession seems ever more likely. Those stocks paying dividends today may still have to cut them tomorrow.
But even considering this, there is a way forward, I feel.
Look to past dividends for the future outlook
The basic premise I now follow for finding dividends is looking at firms that consistently paid good yields in the past.
I understand having to suspend dividends in times of trouble. In fact I almost always agree with the decision. As a long-term investor, I am glad to see management redirecting money into their businesses rather than keeping investors happy with dividends.
Times may be bad now, but eventually things will get back to normal. When they do, those solid companies that paid dividends before will pay them again. What is even better, locking in those shares now when prices are under pressure, should mean the relative yield we get when dividends come back will be even better.
Criteria to look for
So here are a number of criteria I look for. Firstly, I am looking at blue-chips with strong brands. Preferably companies that don’t seem to have too much trouble on the horizon.
Short-term problems like low oil prices or bad loan provisions don’t bother me. These will see improvements eventually. But companies that may not survive a fundamental shift in their market, such as customers moving to online rivals, are perhaps ones to be avoided.
Next, I am looking for shares that paid out dividends consistently in the past. The best guarantee of picking a future dividend stock that isn’t paying dividends at the moment seems, to me, to pick one that has almost always paid them in the past!
A quick look at a company’s payment history shows this. What’s more, I would be looking for decent dividend growth year-on-year in the past. Anything over 2% or 3% seems about right.
Lastly, I would be looking for previous yields in what I think of as the ‘Goldilocks zone’. This is between 4% and 6% yields as a general rule, though I have picked up oversold shares with dividends higher than 6% many times. Anything less isn’t worth it, anything higher is probably too much to sustain.
It may not seem like the best time to find dividends right now. But with prices under pressure, we may in fact have a great opportunity to lock in strong yields when everything gets back to normal.