The stock markets have been volatile in 2022. Right now, some calm has been restored. But inflation is still not entirely under control, interest rates are rising, and a recession is still a threat. I would not bet against a choppy 2023. So I am looking for dividend stocks to buy in 2022 and hold through 2023 and beyond.
Are income stocks a good buy?
When share prices fall, dividends offer some much-needed return in my portfolio. Since I am not yet drawing any income from my portfolio, I can reinvest any dividends I receive. If prices are falling, then whatever I reinvest will go further. So, I believe dividends, or income stocks, are a good buy for my portfolio.
I cannot buy any old dividend stock and hope for the best. I need a degree of safety. It would be a fruitless exercise to invest for income only to find a company cuts its payouts to shareholders. For that reason, high yields are not necessarily good picks. I prefer a share that offers a moderate yet more assured yield over a chunky but potentially risker one.
For safety, I usually look for dividend cover of more than 1.5 times earnings. That means for every pound of dividends paid, the company makes at least £1.50 in earnings. A company that has not cut its payouts to shareholders in the last five or ten years is also good. These features are essential because I am looking for potentially excellent long-term performance from my stock picks.
UK dividend stocks
FTSE 100 member National Grid offers a 5.14% yield and can boast 20+ years of consecutive dividend growth. It has a monopoly in its ownership of much of the UK’s electricity infrastructure. But, its profits are regulated, and its deals get scrutinized. For example, the recent disposal of its UK gas transmission has drawn the attention of the competition and markets authority. Nevertheless, this slow and steady company with a sustainable competitive advantage make it a solid long-term pick for the income component of my Stocks and Shares ISA.
Unilever shares yield 3.61%, and shareholders have not seen their payout cut in two decades. Its revenue was second only to Proctor & Gamble in the household and personal care space and L’Oreal in beauty products. Of the 25 leading fast-moving consumer goods brands globally, Unilever has eight entries, more than any other company. That’s a lot of recurring revenue sources. But, Unilever is not immune to inflation. Its input costs have soared, hurting margins. The company is also keen on acquisitions that have not always performed admirably. Yet, I still believe Unilver deserves its place in my ISA.
The dividend yield on British American Tobacco stock is 6.75%, and again has made continuous dividend payments since at least 2002. British American Tobacco faces a problem in that the number of cigarettes and cigars sold annually is declining. However, the value of the tobacco market is increasing, which is a testament to the power of nicotine addiction in allowing tobacco companies to keep increasing the price of their products. That might be unsustainable, but the company is moving into alternative nicotine products, a growth market. Although the company has a lot of debt to service, rates are rising, I continue to hold it in my portfolio.
James McCombie has positions in British American Tobacco, National Grid, and Unilever. The Motley Fool UK has recommended British American Tobacco and Unilever. 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.
Motley Fool UK 2022