Last year saw many firms suspend or halt their dividends. Times were tough, and uncertain, and companies needed to make cuts. Though we are hoping for better now, there is still much uncertainty surrounding Covid-19, vaccines, and the economic impact of lockdowns. With all this to worry about, here is what to look for when selecting dividend shares this year.
My top three criteria for dividend shares in uncertain times
Many of my normal rules for selecting dividend shares go out the window when times are risky. However, some become more important than ever. Even in these uncertain times, there are strong companies out there performing well. Some of these firms pay dividends. If their shares are trading at lower prices now, then it may be possible to lock in high yields.
Reduce risk with big blue chip stocks
In risky times, when looking to invest for income, this is one of my main rules. Dividend shares that lose your initial capital are bad investments, no matter how much they yield. I look for larger firms with a strong brand. In the UK this usually means looking at the FTSE 100.
There are still good yields to be found, but the size and strength of these companies should minimise the risk of losing money. Of course you still need to do your research, but common sense can help. Are you going to invest in the big airlines while nobody is flying, or is online shopping a better option during lockdown?
The best dividend-paying companies can afford to pay them
Perhaps an obvious statement, but a company that pays dividends should be able to afford it. Historically this has not always been the case. More than one firm has enticed investors with high payouts it can’t afford.
For this I look at a company’s finances. I want to see year-on-year growth in both revenue and, more importantly, profit. The impact of Covid-19 may have upset this pattern, of course. I have to consider the company’s prospects going forward, and the corona crisis may be a one-time blip. However, given the way 2021 is looking, I’m concerned that Covid-19’s impact is far from over. I would probably avoid shares that have been badly affected by the pandemic.
Linked with this, I look for consistent dividend payouts. I want a company that has paid dividends regularly for many years, preferably with dividend growth each year. Again 2020 could be an exception to this, depending on the firm’s specific situation.
Yields are the one area where these uncertain times can actually offer better opportunities. Dividend shares pay out on a pence-per-share basis, not as a percentage. This means the share price as well as the payment itself determine yield. A low share price means stronger percentage returns.
Again this is very much dependant on the firm, and needs good research. It is only a good investment when the share price is low for non-fundamental reasons. Things like a bad news story or short-term worries often hit stock prices, even when a company’s fundamental outlook doesn’t change.
For me, this seems an even more likely scenario in 2021. Find good, strong firms, and time your investment right. We should be cautious when finding dividend shares in 2021, but I think some great opportunities are out there.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.