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Dividends can be a great way to earn income. Once I invest, I can see the cash flow without much extra work on my part.
Although not all companies pay dividends to shareholders. Some choose to reinvest in efforts to grow the business instead. That is why many dividend companies are established and run more mature operations.
High yielding dividends
in the FTSE 100are the five highest yielding dividend stocks. Persimmon, Rio Tinto, abrdn, Antofagasta And M&G. On average, they currently offer a 12% dividend.
If I use my £10,000 investment to buy these five shares, I expect to get £1200 in dividends next year. At first glance it looks good.
But especially large yielding stocks can sometimes be dividend traps. These may present an attractive product now but may disappoint in the future.
For example, either the dividend may be cut or the share price may decrease. Either is a disappointing result.
Reliable dividend
I’d rather have a reliable second income. That’s why I consider other things besides productivity. I am interested in investing in businesses that can grow over time.
Since many will be mature companies, I would even be willing to accept rapid growth. But I avoid investing in industries that face long-term decline.
I look for companies that can deliver steady earnings growth and benefit from pricing power. This feature is particularly appropriate in the current inflationary environment.
As costs increase, I prefer businesses that successfully pass these on to customers at higher prices.
The best dividend stocks have the potential to pay you cash from your current earnings. This is typically measured in fractional coverage. A result of less than one (meaning the earnings are equal to the dividend payout) can indicate red flags regarding the relative value. I tend to avoid these.
Which dividends?
So what am I going to buy? First, I consider iron and mineral giants Rio Tinto. This FTSE 100-listed behemoth, known for producing iron ore, should benefit from the global transition to electric vehicles. Iron ore is used to make steel, and steel is a popular material for EV manufacturers due to its lower cost than aluminum.
Rio currently has a dividend yield of 12%, making it the second largest in the FTSE 100.
Keep in mind that if the global economy slows down in the coming year, there is a possibility of dividend cuts. Even so, it still offers a juicy dividend.
Next, I buy Legal and general group. It is currently at a 7% dividend yield. What I like about this stock is its 30-year dividend history, which reflects a long policy of paying cash to shareholders.
I am very impressed with the 1.7 dividend coverage. I think it should be able to comfortably continue at current pay levels. A sharp recession could threaten earnings, but L&G should benefit from rising interest rates.
They include other stocks that meet my criteria and that I buy Phoenix team, Taylor Wimpey And National grid. By dividing my £10,000 into these five dividends, I should be able to earn £800 in income. This is an 8% dividend.