Dividend stocks and the passive income they provide can help shield me from declining returns in the wider stock market. One intriguing feature of dividend shares is that yields usually move in the opposite direction to the share price. With many shares falling significantly in the last 12 months, I feel spoilt for choice. I’m unable to make a large enough investment today to retire and live off dividends. However, I see a realistic opportunity to earn £67 a month.
Energy Price Guarantee
Why £67 a month? Millions of British households are receiving £400 this winter through the Government’s Energy Bills Support Scheme. That’s roughly £67 a month until March. What happens after that is still unclear. Chancellor Jeremy Hunt needs to find a balance that supports households while reducing government debt. Through dividend shares, I could continue receiving £800 a year or £67 a month, which I can choose to reinvest or use to pay my bills. Here’s how I’d do it.
10% dividend yield!
Direct Line Group (LSE: DLG) is a British insurance company, operating under many brands. Its stock is currently one of the highest-yielding in the FTSE 350 index. Direct Line shares have fallen 18% in 12 months and there are similar trends across the insurance sector. However, this price fall caused its dividend yield to shoot up, now at 9.88%.
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At the time of writing, each share is priced at £2.42. Given the 9.88% dividend yield, I’d expect to receive a dividend of around £0.24 for each share I own. Therefore, I’d need to buy 3,367 shares to receive my target monthly passive income. Today, that would cost me £8,138.71. Unfortunately, I don’t have that much cash on hand right now. Instead, it may make sense for me to make regular payments over a number of months rather than as a lump sum. Before I do though, let’s assess the risks.
A challenging year
In the third-quarter trading statement, Direct Line CEO Penny James reported that gross written premium fell 5.8% year on year, pointing challenging market conditions, particularly in its motor division. Higher used car and car part prices and longer repair times amid supply chain challenges have inflated claims paid out.
The company’s dividend is higher than its historic average. Is it sustainable? I’m concerned that the dividend cover is hovering around 1. Therefore, earnings generated are only just enough to pay shareholders their dividends. A further squeeze on earnings could force the company to cut its payout.
Importantly, dividends are never guaranteed. They’re subject to both company and macroeconomic risks. The risk is also greater when only investing in one company so diversification is important. However, the company reassured that its outlook for dividend capacity remains unchanged.
For now, I’d feel comfortable investing in Direct Line as it has brand power in a competitive industry — so much so that it doesn’t sell through price comparison websites. It boasts strong retention rates but is focusing on generating new business. In response to the cost-of-living crisis, it’s releasing new, more affordable car insurance policies. The next year could be volatile for insurance, but it should stabilise. Moreover, I trust the management’s track record to weather this economic storm and the stock is on my ‘to buy’ list for later in the month.
