I try to make a passive income from my portfolio by dividend investing. Here’s how I go about it, my two current top picks.
What are dividends and dividend yields?
A dividend is defined as the distribution of some of a business’s earnings to its shareholders. It is usually determined by the company’s board of directors. These earnings are paid as a reward to investors for putting their money into the venture. Dividends are paid in the form of cash or additional stock.
If a company decides to pay a 5p dividend and its current share price is 100p per share, then its yield equates to 5%. If this share price dropped to 50p, then that 5p dividend would represent a 10% yield.
Beware of inflation when dividend investing
As a dividend investor myself, I have to be wary of inflation as a risk. Inflation effectively erodes the real value of money and therefore means my investments have to work harder than before. For example, if prices are rising by 3% each year, my investments need to rise by at least the same 3% just to stay even.
Dividend investing and dividends are a great way to beat inflation as, generally, dividends should increase faster than inflation. However, nothing is guaranteed. Higher inflation hurts firms because it means cost of productions and overheads will rise. This is why inflation can be deadly if out of control.
Dividend payouts can hold up well in situations when inflation is on the rise. I believe one of the primary reasons is the need for companies to keep shareholders on side at the toughest times. If a firm cut its dividend, it would potentially result in a mass stock sell-off.
The yield I look for when dividend investing
I look to the FTSE 100 when hunting for the best dividend yield first. Although yields vary widely across the index, there are many strong dividend stocks there. Personally, I aim for 4%-6% yield as I believe this can stay ahead of inflation levels. I also look to diversify my picks and invest in more than one or two stocks to protect my money. The FTSE 100 dividend yield average is 3%.
Two stocks I like
My first dividend pick is global mining giant Evraz (LSE:EVR) which currently boasts a yield of over 12%. It is riding high on the back of global demand for steel and other resources as major economies are reopening for business. The risk with Evraz is that commodities such as steel and other materials can be volatile and affected by political and economic fluctuations. This can affect demand, profitability, and in turn any dividends.
My second pick is home builder Persimmon (LSE:PSN). Its dividend yield is above 8%. The reopening saw a record demand for houses in the UK and the years ahead are set to see more new homes built to address a long-term shortfall in supply. The risk with Persimmon is the cost of raw materials has increased substantially. Again, this could affect financials and any dividend payments.