As an income-orientated investor, I’m always on the lookout for the best dividend stocks to buy now. This is because dividend yields are constantly changing. Although the interest rate on my cash balances doesn’t often change, dividend yields change due to movements in the share price and dividend payments. As a result, it’s handy for me to revert back to my checklist when thinking about adding new stocks into the mix.
Checking why the yield is attractive
It’s rare that a dividend stock would come onto my radar out of the blue. Most established FTSE 100 and FTSE 250 stocks have a history of paying dividends. So the best dividend stocks right now are likely candidates that have been on my list before.
For arguments sake, let’s say a company that I didn’t know well was offering a high dividend yield. This would interest me, and the first thing I’d look at on my checklist is why the yield is attractive. Which component was the driver – the share price or the dividend?
If the driver was a falling share price, I’d be more hesitant to conclude that this was a dividend stock worth buying straight away. A falling share price could indicate that the company was in trouble. The knock-on impact of this could be that the dividend might actually be cut in the future. This might be done to preserve cash flow within the business.
However, if the higher yield was driven by an increase in the dividend paid per share, this is a good sign. In this case, I’d be very interested to look at what has triggered this higher payout. If it was due to higher profits or an increased desire to pay out to shareholders, I’d consider buying the stock.
The outlook for the best dividend stocks
Another point on my checklist for the best dividend stocks to buy is the outlook for the company. One of the restrictions of the dividend yield calculation is that it takes the past payment figures. There isn’t a guarantee that the dividend payments for the future (after I buy the stock) would be the same.
From this angle, I need to ensure that I’m happy with the future prospects for the company. I could look at what sector the business operates in and decide on that basis. For example, the reopening of the UK economy would provide a more positive outlook for areas such as retail, tourism, and travel.
A final point on my checklist is to mirror the future outlook with the past. Some of the best dividend stocks are the ones that have a solid track record of paying out dividends over several years. If I could satisfy myself that a firm with a track record of paying out income has a positive outlook, it would definitely be a stock I’d look to buy.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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 2021