Some of the very best UK-listed companies can be found on the FTSE 350. These companies have often been paying dividends for a very long time, making them prime candidates for a tax-efficient ISA account.
UK stocks paid out an eye-watering £100 billion in dividends last year, and the bulk of that cash came from the biggest and best-known companies in the FTSE 350 - including Direct Line Insurance (LON:DLG).
There are various ways of finding blue chip dividends, but here is a strategy with some basic rules to put you on the right path to finding the best dividend stocks in the FTSE 350. Let’s look at the Direct Line dividend as an example of how it works.
Four rules for finding dividend share
1. High (but not excessive) dividend yield
Yield tells you how much a company pays out in dividends each year as a proportion of its equity. High yields are obviously appealing, but caution is needed. A high yield can be the market's way of saying it is expecting a dividend cut, so it pays to be wary of excessive yields.
- Direct Line has an eye-catching dividend yield of 8.38%.
2. Safety in size
Part of the appeal of FTSE 350 dividend stocks is their financial strength. Large size and scale means that their vast cashflows tend to be predictable. It gives them the resilience to maintain their dividends through the economic cycle. And while large companies aren’t immune from making dividend cuts, their financial strength is an appealing safety factor for income investors.
- Direct Line is an conservative, large cap in the Property & Casualty Insurance industry and has a market cap of £4,139m
3. Dividend growth
Another important marker for income investors is a track record of dividend growth. Progressive dividend growth can be a pointer to payout policies that are being handled carefully by management. Rather than aggressively dishing out earnings, dividend growth companies tend to have more modest yields, but are better at sustaining their payouts.
- Direct Line has increased its dividend payout 5 times over the past 10 years.
4. Dividend cover
Attractively high yields obviously turn heads - but it’s important to know that a dividend is affordable. Dividend cover is a go-to measure of a company's net income over the dividend paid to shareholders. It’s calculated as earnings per share divided by the dividend per share and helps to indicate how sustainable a dividend is.
Dividend cover of less than 1x suggests that the company can’t fund the payout from its current year earnings.
- Direct Line has a dividend cover of 1.10.
With these four dividend rules, you can track down high yield shares with a record of growth and safety. On this basis, Direct Line Insurance could be worth a closer look.
To find out more you might want to take a look at the Direct Line Insurance StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.
To find more stocks like Direct Line Insurance, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s FTSE 350 Dividend Legends - which gives you everything you need. So why not come and take a look?
Plus, if you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.