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Here’s why I’m buying dividend shares in a recession

Young female business analyst looking at a graph chart while working from home
Young female business analyst looking at a graph chart while working from home

With the UK in recession, many folks are worried about how they’re going to make it through the next couple of years. And most of us will be concerned about the long-term impact on our retirement investments. I invest in dividend shares, so what changes will I make during the down spell?

Firstly, many investors will have one question at the front of their minds — how can I preserve my wealth during a period of recession? They want to emerge from recession with their funds as intact as possible, especially in the face of high inflation.

That’s a fine aim. But I think there’s a more important, longer-term, question to ask. How can I maximise my long-term investing potential during the recession?

Long term

I don’t really worry about short-term dips, because they happen all the time. And in my experience, investors who focus on the short term tend to be the least successful long-term investors. So while I’d like to have the best 2023 and 2024 that I can, I won’t do anything that I think would jeopardise my returns over the next decade.

I’ll continue to invest in dividend shares, but I won’t simply turn a blind eye to short-term risk. I mean, short-term risk is just long-term risk that’s caught up with us, right? So the best risk-reducing strategies should work for all time.

FTSE 100 dividends

Right now, there are some very high FTSE 100 dividend yields on offer. But that’s not necessarily what I’m looking for.

I want well-covered dividends, from businesses with strong long-term cash flow. For example, Legal & General is on a forecast dividend yield of around 7%. That’s attractive. But, more importantly, it would be covered 1.9 times by forecast earnings.

I expect pressure on the finance sector, for sure, and dividends might suffer. But that cover provides more safety than, say, Vodafone, whose forecast 8% would only just be covered 1.0 times by predicted earnings.

Strong cover

The Legal & General share price is down 11% in the past 12 months. And buying at lower prices would not only boost this year’s dividend yield, but all future yields, well beyond the recession.

Similarly, Taylor Wimpey shares have fallen 34% over 12 months. But that pushes the expected dividend yield as high as 9%. I expect the property market to suffer a couple of years of weakness. But at least this year’s dividend would be covered around 2.0 times by forecast earnings.

Future yields

So again there’s some leeway there to hopefully help with any squeeze. And buying a stock at such a depressed price would boost all future dividend yields on that purchase, not just the latest.

I already have investments in the insurance and housebuilding businesses. And they’re two that I’m looking to put further cash into. I’m fully aware of the risks, and I wouldn’t be at all shocked if they don’t do well over the next two years.

But I hope to more than make up for that over the following decade, when my effective dividend yields should be boosted by buying when share prices are down.

The post Here’s why I’m buying dividend shares in a recession appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. 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