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Four reasons why Direct Line Insurance (LON:DLG) could be the next dividend stock for your portfolio

Ben Hobson

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).

Given the unsettled market conditions, those record-breaking payouts were more important than ever. They were proof that solid, high yielding dividend stocks are a strong source of investment profits in both good times and bad.

These kinds of dependable returns are a major reason why high yielding FTSE 350 shares are so popular. So how do you find them?

Well, there are various ways of finding blue chip dividends, but I’ll show you a strategy with some basic rules to put you on the right path to finding some of the best dividend stocks in the FTSE 350. Let’s look at the Direct Line Insurance dividend as an example of how it works.

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Four rules for finding dividend shares

1. High (but not excessive) dividend yield

Yield is an important dividend metric because it tells you the percentage of how much a company pays out in dividends each year relative to its share price. High yields are obviously appealing, but caution is needed. When the market anticipates a dividend cut, the share price will fall, which actually pushes the yield higher - but this can be a trap. So it pays to be wary of excessive yields.

  • Direct Line Insurance has an eye-catching dividend yield of 8.55%.

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 Insurance is an conservative, large cap in the Insurance industry and has a market cap of £4,082m.

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 Insurance 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 Insurance has dividend cover of 1.16.

Next steps

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.