Of course, dividends are never guaranteed and stocks are no substitute for cash savings. But the income available from good quality dividend shares is generally much higher than from savings accounts. For me, that makes shares an attractive investment at the moment.

A defensive 6.8% yield

My first choice is British American Tobacco (LSE: BATS). This FTSE 100 tobacco group carries some ethical and regulatory risks, but I think that BATS’ increasing focus on lower-risk products such as vapes goes some way to reducing these concerns.

For now, the reality is that this business is one of the largest in the tobacco sector and enjoys stable profits and strong cash generation. British American generated £7.2bn of surplus cash in 2021, of which £4.9bn was returned to shareholders.

Fortunately, British American was also able to reduce its debt levels by around 10% last year. The group’s leverage has been a concern for me in the past, but I’m increasingly comfortable with the situation.

The BATS share price has risen by nearly 25% so far in 2022, but the stock still offers a generous 6.8% dividend yield. With the shares trading on less than 10 times forecast earnings, I’d be happy to add British Americanto my portfolio at current levels.

Dividend shares: a property pick

I’m a fan of using real estate investment trusts (REITs) to generate a property income from my share portfolio. One UK REIT I’ve been following for a while is NewRiver REIT (LSE: NRR).

NewRiver owns regional retail property around the UK. The company’s sites are typically local or regional retail parks, and shopping centres in small and mid-sized towns.

It’s been a difficult few years for the group. Even before the pandemic, conditions were tough for retail landlords. To add to NewRiver’s problems, it had too much debt, in my view.

CEO Allan Lockhart now seems to have pulled off a difficult turnaround. He’s sold a number of properties, cut debt, and restored the dividend. Occupancy in NewRiver’s remaining portfolio is over 95%, and new rental rates are rising.

NewRiver still has a few problem sites. But the shares offer a forecast yield of 7% and I believe the business is now on a sound footing. I’d be happy to buy this dividend share for extra income.

A safe 8% yield?

Insurer Chesnara (LSE: CSN) buys life insurance and pension policies from other companies, and runs them to maturity.

This specialist business model generates plenty of cash, most of which Chesnara returns to its shareholders. As a result, this insurer is currently one of the highest-yielding stocks on the London market, with a forecast yield of 8%.

One risk I can see is that Chesnara could gradually run out of new acquisition opportunities. The business might then go into decline unless management pursued a new strategy.

However, there’s no sign of this yet, and a 17-year track record of dividend growth gives me confidence in Chesnara’s experienced management. I own plenty of insurance stocks already, but if I was buying an insurer today, Chesnara would definitely be on my shortlist.

Let’s take a look at a couple of great dividend shares that I’m considering right now. The average FTSE 100 dividend yield is currently 3.3%. Although a share yielding 3% can provide some extra passive income, there are several shares that offer much more. 

Dial-a-dividend

For instance, telecoms provider Vodafone (LSE:VOD) currently yields 5.5%. But the dividend yield isn’t the only factor I’d consider. I’d also look at how sustainable it is. Can it afford it? For Vodafone, I’m confident it has sufficient cash flow to sustain the current level of payout. That’s because its dividend cover ratio of 1.1 suggests that it’ll earn more in earnings than it needs to pay out in dividends. Secondly, Vodafone has regularly paid dividends for almost three decades. It has a subscription-based business model that provides consistent cash flow. Looking forward, new technologies including 5G and Mobile-Edge Computing could create additional growth opportunities.

Debt pile alert

A word of warning though. The company has a substantial debt pile that totalled €41bn (£34bn) last year. It could face higher finance costs if interest rates move higher over the coming months or years. That could reduce earnings and raise the chance of cutting its dividend. Overall, I reckon it has solid financials that can sustain its dividend, so I’d consider buying the shares for my Stocks and Shares ISA.

Little-known dividend shares

Some of the shares that I find are relatively unknown. But that’s ok. As long as they display the characteristics that I’m looking for, I really don’t mind if they aren’t household names. After all, as an investor, I just want to grow my investments. One little known dividend share that I’d buy right now is Chesnara (LSE:CSN). This mid-cap firm is in the business of managing life and pension policies. It stood out to me for three main reasons: it has an attractive dividend yield of 7.5%; it has 17 years of dividend history with consistent growth in cash payouts; and it has a proven successful track record of buying life and pensions businesses.

Risks and benefits

At a time when I’d expect the Bank of England to raise interest rates to tackle persistently high inflation, it’s great to find shares that could actually benefit. Higher interest rates should generally be positive for Chesnara. That said, there are still risks on the horizon. Sharp moves in currency and financial markets can raise its risk exposure. A large spike in the level of claims could also do the same.

Overall though, I like what I see and would happily buy. Dividend shares that consistently pay over 7% for so many years are rare. So when I find them, I’m inclined to snap them up pretty quickly.

bAs such, I have been searching for inflation-busting dividend stocks to add to my portfolio. Here are three income stocks I would buy today, all of which yield between 7% and 9%. 

Leading dividend stocks 

Topping my list with the lowest dividend yield in the pack is the financial services firm Chesnara (LSE: CSN). This company manages books of life and pension policies, a relatively niche and specialist business model. 

The nature of the business means the enterprise has to take a long-term perspective when planning for investments. This approach has benefits and drawbacks.

On the positive side, the company has a relatively high level of confidence in its income projections for the foreseeable future. Cash flows from pension and life policies are somewhat predictable. 

On the other side of the equation, it has to be conservative when managing payouts to investors. The company cannot distribute too much money, or it may breach its regulatory requirements. 

At the time of writing, the stock supports a dividend yield of 7.7%. While the distribution is by no means guaranteed indefinitely, I think it looks desirable in the current interest rate environment. 

Market growth

Over the past couple of years, the wealth of the most affluent section of society has increased significantly. This suggests demand for wealth managers such as M&G (LSE: MNG) could increase as we advance. 

As one of the best-known wealth managers in Europe, the company has a solid competitive advantage. It is also boosting its footprint by acquiring smaller peers and is expanding into different sections of the market. Offering consumers various alternatives to the traditional wealth management service is another growth avenue the group is pursuing. 

One of the main challenges the business will face going forward is competition. It is not the only company in the space. Other wealth managers are also trying to expand their footprint and acquire more customers.

Despite this headwind, I would buy the company with its 8.4% yield for my portfolio of dividend stocks. 

Inflation-busting income

The final company I would buy for my portfolio of dividend stocks is the housebuilder Persimmon (LSE: PSN). 

Shares in this firm currently offer a dividend yield of 9.7%, at the time of writing. The yield has shot up after the government announced it would be seeking to recoup billions from developers to help deal with the cladding crisis. 

The financial fallout from this is possibly the most prominent risk hanging over the stock today.

However, there is also a significant tailwind driving the company forward. That is the structurally undersupplied UK housing market.

It seems likely that demand will continue to outpace supply in the housing market for the next three to five years, at least, suggesting Persimmon should be able to continue to find buyers for its new properties for the foreseeable future. 

With this tailwind, I think its dividend is here to stay. 

Here are three dividend shares that I would buy today, all of which support dividend yields of 6%, or more. 

Office income

The first company I already own in my portfolio but would be happy to buy more of is the Regional REIT (LSE: RGL). With a dividend yield of 7%, at the time of writing, the stock offers an attractive level of income from a portfolio of properties around the UK.

The group focuses on acquiring properties outside the M25, predominantly offices with a diverse and financially stable customer list. The strategy has proven its worth over the past 24 months.

As other landlords have struggled to collect rent from tenants, Regional has managed to sail through the pandemic relatively unscathed. Of course, this does not mean the group is invincible. Rent collection levels may decline if the country enters a period of prolonged economic uncertainty. 

Still, I think the potential rewards of owning the shares far outweigh the risks. 

Renewable energy dividend shares

Bluefield Solar Income (LSE: BSIF) focuses on acquiring and managing UK-based renewable energy and storage projects.

This is a growing industry, and Bluefield is using its clout in the investment industry to expand into different sections of the market. It recently completed its maiden wind portfolio acquisition as well as two ready-to-build battery storage projects. 

Diversifying across the renewables sector makes a lot of sense. It should also help support the company’s dividend to investors. At the time of writing, the stock supports a dividend yield of 6%. The net asset value for the business is 117p compared to the current stock price of 120p.

Usually, I would avoid buying funds at a premium to net asset value but, on this occasion, I would be happy to pay a premium to purchase exposure to this fast-growing sector. 

Risks the firm may encounter as it advances include competition for assets, which could cause it to overpay. Rising interest rates may also raise the cost of its borrowing. 

Market consolidator 

The final company that could be an excellent fit for my portfolio of dividend shares is Chesnara (LSE: CSN). This business buys and manages books of pension policies from other fund managers and corporations. It is always looking for new deals to expand its footprint and bring economies of scale to the operation. 

When the company has acquired a business, it can use its size to push down costs and free up capital. Excess cash is then returned to investors. By using this approach, the firm can fund a hefty dividend to investors. At the time of writing, the stock yields just under 7%. 

Unfortunately, as pension management is a highly regulated business, this level of income is far from guaranteed. The company could be forced to reduce its dividend if regulators believe it is paying out more than it can afford. 

High-dividend-yield opportunity

Chesnara is engaged in the management of life and pension books of business in the UK and Europe. The company acquires pension assets from other managers and then uses its size and experience to reduce costs and improve performance.

The end goal for management is to increase cash flow from the acquired books of business. The firm can then use this cash to fund further acquisitions and a dividend to investors. 

The group’s latest acquisition illustrates how the model works. Chesnara has acquired £2.9bn of assets under administration and approximately 80,000 policies from Sanlam Life & Pensions UK Limited, a specialist provider of insurance and long term savings products in the UK.

The organisation paid £39m in cash for the assets. However, management estimates that they have an economic value for the group of £48.1m. 

Based on this estimate, the company believes the assets provide “future material value creation potential from expense and capital synergies.” Better respected returns from investing the assets could enhance the overall value for the group. 

Chesnara believes there are plenty of sellers out there of these assets, which could provide a long runway for growth for the business. It could also support substantial dividend expansion in the years ahead. 

This is what I am really interested in. The company is highly cash generative, thanks to its unique business model and growing scale. It also has a track record of steady dividend increases. 

City analysts believe the company’s dividend yield will total 7.9% this year, based on an expected full-year payout growth rate of 3%.

Undervalued

As well as this attractive dividend yield, the stock is also trading at a historical P/E ratio of 6. It is incredibly rare to find a company with a dividend yield that exceeds its P/E multiple. This signifies to me that the stock is both a dividend champion and significantly undervalued. 

Based on these factors, I would buy the stock for my portfolio today.

However, Chesnara might not be suitable for all investors. Pension management can be a complex business. Even a slight change in interest rates can have a significant impact on managers’ calculations. A substantial stock market crash could also lead to disruption across the business. 

Further, the sector is highly regulated. Additional regulations could increase group costs and reduce the amount of cash available for distribution to investors.

I will be keeping an eye on these risks and challenges as we advance. 

High-yield stocks to buy

The first stock on my list is Diversified Energy (LSE: DEC). Formerly known as Diversified Gas & Oil, the independent hydrocarbon production company has a strong dividend track record.

Last year, it paid out 15.3p per share, giving a dividend yield of 10.6% on the current share price. Analysts are expecting a distribution of 16.1p this year, which translates into a yield of 11.2%.

While there’s no guarantee the company will hit these targets, I’m encouraged by its low production costs and hedging programme. These reduce the risk that volatile oil and gas prices will force the firm to cut its distribution. For these reasons, I’d buy Diversified Energy for my portfolio of high yield income stocks today. 

Still, this investment might not be suitable for all, considering its environmental considerations. That’s probably the most significant challenge the enterprise will face going forward.

Booming market

Homebuilder Persimmon (LSE: PSN) has rapidly carved out a reputation as being an income stock over the past few years. 

Back in 2013, the company laid out a multi-year cash return plan, which it has consistently outperformed ever since. Given its strong cash generation, Persimmon recently hiked its return target once again. The stock is going to pay a special dividend of 110p in August, and 125p in July 2022.

These figures suggest those who buy the shares today will see a yield of 8% on their investment. This is why I’d buy the company for my portfolio of high-yield stocks today. 

That said, past performance should never be used to guide to future potential. There’s no guarantee the homebuilder will continue to pay special dividends to investors.

A drop in demand for new build properties, a fall in home prices, or an increase in interest rates are all risk factors that could jeopardise the firm’s cash return plans. 

Income generation

The final high-yield stock I’d buy today is Chesnara (LSE: CSN). With a dividend yield of 8.6%, at the time of writing, the stock immediately looks attractive. However, this yield says something. The firm’s balance sheet is complex, which may put some investors off.

Indeed, the firm manages books of pension and life insurance policies. These policies can be tricky to manage as even a slight increase in interest rates can raise liabilities substantially. This may lead to a dividend cut. 

This risk and level of uncertainty may put some investors off from owning the shares. However, I’m comfortable with this, which is why I’d buy Chesnara for my portfolio of high-yield stocks.

I believe this is also a growth industry as many companies are trying to get these liabilities off their balance sheets. Larger operators such as Chesnara can manage these policies more effectively and with lower costs. 

Backstory 

Chesnara is a life insurance company, servicing around 0.9m policies in the UK and around Europe. Its largest market is actually Sweden, where it currently has 365,000 policies. 

Like other companies in the industry, Chesnara operates a business model that generates high cash flow and cash retention. In the 2020 results, the group solvency ratio was an impressive 156%. Aside from having liquid assets for solvency, it uses the funds to pay out to shareholders in the form of dividends. This is one reason why I think the Chesnara share price appeals to some, as income investors buy the stock for dividends.

Chesnara defines the change in cash generation as “the movement in the group’s surplus own funds above the group’s internally required capital.” To this end, it measures the growth over time. Over the past five years, it’s grown 152%. 

For 2020, it paid out a dividend of 21.9p per share. With the Chesnara share price currently trading around 268p, this gives a dividend yield of 8%. When I consider that the FTSE 100 average dividend yield is around 3%, this is very attractive.

Is there value in the Chesnara share price?

As an income investor, I’d say there is good value to be had. To be able to buy the stock when it offers a dividend yield in excess of 8% is something that appeals to me. 

The company also has grown the dividend per share for the past 16 years, so I feel this is a sustainable yield going forward.

However, the Chesnara share price could be a value trap when I look at historical share price performance. The shares are down just over 5% over the past year. Two years ago shares were trading at 353p, meaning that I’d be down over 33% if I’d bought shares then. So even with a healthy dividend yield, I’d still be in the red overall over this time period due to the falling share price.

What has caused the falling share price? The pandemic clearly negatively impacted business. Pre-tax profits in 2020 were down to £24.6m from £96.1m in 2019. Given that the results ran through to the end of the calendar year, I’d expect 2021 full-year results also to be impacted.

Another reason for concern is the fact that the company uses Asset Liability Matching (ALM) for its insurance. This aims to cover the future liabilities due by investing in low risk assets (such as bonds). However, with interest rates and bond yields falling, the return on these assets is unlikely to be particularly high.

After looking into it, I’m deciding against investing in Chesnara shares. I appreciate the dividend yield is good, but the risk of having my income more than eroded by a falling share price is too high at present.

Despite rising profits, double-digit dividend growth and a strengthened balance sheet, shares in the FTSE 100 insurer have fallen by 5% over the last year, lagging the wider market. As a shareholder myself, I’m not sure why the market is so cautious about this successful turnaround.

Although half-year profits were hit by severe winter weather in the UK and Canada, overall performance was still pretty solid in my view. Operating profit excluding disposals rose by 4% to £1,421m, and this figure was supported by cash generation of £1,493m.

The group used some of its spare cash to repay £500m of high-cost debt and return £600m to shareholders through a share buyback. Alongside this, the interim dividend rose by 10%.

Aviva’s regulatory ratios also remain comfortable. And its performance over the last few years suggests to me that CEO Mark Wilson’s turnaround plans have been successful. So what is wrong?

No loyalty

We all know why we need insurance. But the reality is that we don’t really like paying for something we rarely use. We tend to shop around for the cheapest insurance that offers the cover we need, and we don’t hesitate to switch insurers when we renew.

Insurance bosses like Mr Wilson aren’t happy about being seen as a necessary evil. They want to customers to stay loyal and purchase multiple services from them. The prize at stake is higher profit margins and an expanded share of mature markets such as the UK.

Achieving this change may not be easy. Efforts so far include a web portal where you can manage all Aviva services, an app to help make you a safer driver, and leak detection kits for home insurance customers.

Will this work? It’s too soon to say. But I suspect it could. In the meantime, I believe that Aviva shares are probably getting close to the bottom of their trading range. Broker forecasts put the stock on a price/earnings ratio of 8.6 with a 6.1% yield for 2018. I maintain my dividend buy rating on this stock.

Just show me the cash

My second pick today is also an insurance firm. But it’s very different. Chesnara (LSE: CSN) buys up closed books of life insurance policies from other insurers and runs them through to maturity.

What this means is that the group doesn’t have to worry about customer acquisition, marketing or developing new services. The key to its success is skilled management of its policies and low costs.

Chesnara has been very successful. Its share price has tripled over the last 10 years, while dividends have risen every year since the group’s flotation in 2004. This gives me a good level of confidence in the company’s management and strategy.

Today’s half-year results suggest to me that this progress is likely to continue. Although the group’s economic value — a valuation measure used by insurers — fell by 3% to £700.8m, this was mostly due to currency headwinds. Cash generation remained strong at £48.6m, providing support for a 3% increase to the interim dividend.

Looking ahead, analysts expect Chesnara to pay a full-year dividend of 20.7p per share, giving the stock a 5.3% yield. In my view these shares are worth considering for a long-term income.

The firm was hit particularly hard by the demise of Toys R Us, one of its largest customers. The bankruptcy forced Character to warn last year that results for the year ending August 2018 would be “significantly lower than market expectations” following the loss of income from the UK’s largest brick and mortar toy store.

Major setback 

The Toys R Us demise is already having a significant impact on Character. Today, the company published its financial figures for the half year ended February, showing a 36% decline in operating profit and similar contraction in pre-tax profit. Basic earnings per share for the period fell 38% year-on-year, and after including the impact of adjustments on foreign currency derivative positions, basic earnings per share declined 92% year-on-year. Group net cash was £14.3m, down from the £18.6m reported at the end of the same period last year, but up from the £11.5m reported at the end of August 2017.

However, despite Character’s dismal performance during the first half, management is upbeat on the outlook for the rest of the year as the Toy R Us fallout dissipates. 

“We continue to have great strength and depth across our brands and a wide range of long-term customers and suppliers,” the half-year update noted, continuing, “the directors remain optimistic that the business will see a return to its previous growth pattern during the second half of this financial year.“

Still, despite management’s optimism, I’m wary about Character’s outlook as the group has disappointed on growth several times in the past. With this being the case, even though the shares might look attractive today, trading at a forward P/E of 11 and supporting a dividend yield of 5.1%, I’m in no rush to buy the stock.

Slow and steady wins the race 

On the other hand, I’m more optimistic about the outlook for financial services business Chesnara (LSE: CSN). 

This is a holding company engaged in the management of life and pension books of businesses in the UK, a relatively stable and predictable industry. The enterprise buys life insurance funds closed to new customers and then manages them to maximise profit for investors. 

So far, Chesnara’s strategy has produced fantastic results. The dividend has grown at a steady rate of 3% per annum over the past five years and including the dividend, the shares have produced a total average annual return of around 16% per annum since 2012, smashing the FTSE 100 over the same period.

As the company continues to consolidate its position in the market, by buying up unwanted pension businesses, I believe that this performance is set to continue. 

With this being the case, compared to struggling Character, which will remain at the mercy of consumer trends, Chesnara, with its more stable and predictable business model (as well as the long-term income stream from pension management) looks to be the better investment. The shares currently support a dividend yield of 5.1%.

Strong cash generation

Chesnara (LSE: CSN), the life insurance and pensions consolidator is a great example of small-cap stock with a dependable dividend policy.

Owing to economic tailwinds and the successful completion of the acquisition of Legal & General Nederland, Chesnara’s reported group cash generation in 2017 soared to £86.7m, up from £34.3m in the previous year. Pre-tax profit more than doubled from £40.7m to £89.6m, after it partially benefitted from a £20.3m non-recurring gain from the takeover.

As a result, the board delivered another 3% increase in its full-year dividend to 20.07p per share, marking its 13th successive rise in annual dividends. At its current share price of 414p, Chesnara yields 4.8%.

Dividend safety

But the shares’ high yield is only part of the story — the safety of the yield is just as important. And in Chesnara’s case, the payout is very secure. With group cash generation covering its dividend payout by nearly 2.9 times (and profits covering the dividend by a similar ratio as well), the possibility of a dividend cut is extremely remote, while the likelihood of further dividend growth is high.

Sure, Chesnara can afford a higher dividend amount right now, but the board has made it clear that it is not currently considering it. Instead, the company is looking to save its firepower for future acquisitions.

Acquisitions enable the company to grow more quickly and often at a much lower cost to writing new business. On the downside however, the company’s future growth is dependent on its ability to continually find new attractively valued acquisition targets.

Attractive yield

Looking elsewhere, Rank Group (LSE: RNK) may not be a company that you may have come across, but I’m sure you have heard of some of its brand names. The company’s main operations are in the UK, where it owns Mecca Bingo, and Grosvenor Casinos, the UK’s largest casino operator.

Recent weak trading figures have sent shares in the company tumbling, but I still reckon its shares offer an attractive sustainable yield. At its current share price of 175p, Rank offers a 4.2% yield which is backed up by more than two times earnings cover. The balance sheet is also in a good position, with the company reporting a small net cash position of £4m at the end of its first half.

Certainly, its brick and mortar business is stagnating or shrinking, with recent figures pointing to a 2%-3% decline in its Mecca and Grosvenor Casino revenues. But this is a manageable decline and is partially offset by double-digit growth in its digital business, which continues to trade strongly. Moreover, one-off factors were partly to blame, with Grosvenor Casinos’ underperformance exacerbated by a negative contribution from its VIP players, while both UK venues were hit by unexpected cold weather this year.

Looking ahead, City analysts expect the dividend to continue grow, with forecasts of 8p this year and 8.6p in 2019. Adjusted earnings per share for 2017/18 are expected to be flat on last year, although growth of 5.5% is pencilled in for next year. This means its dividend cover ratio is expected to fall only modestly from 2.2 times last year, to a still resilient two times figure by 2018/19.