It’s really hard to predict the future. So how can I choose dividend stocks to buy today that I can be confident of holding for 10 years?
Obviously, I can’t be certain of picking winners. The reality of investing is that some stock choices will be unsuccessful. But I think there are qualities I can look for that will help me choose more winners than losers over the long term. In this piece I’m going to look at three dividend shares I’d be happy to buy today and hold until at least 2032.
£1trn in assets
I keep the majority of my investments in a top-rated Stocks and Shares ISA. One of the larger holdings in my ISA is insurance and retirement savings group Legal & General (LSE: LGEN). This is a business that I expect to be around for a very long time.
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Demand for products such as insurance, pensions and investment management is unlikely to disappear, in my view. Legal & General is one of the biggest players in this market in the UK, with more than £1trn of assets under management.
To cope with the impact of low interest rates in recent years, the company has diversified away from financial assets into so-called real assets. These include commercial and residential property, renewable energy projects and data centres.
In general, I think these assets should be a reliable source of income over long periods. The risk, of course, is that Legal & General’s finances are so huge and complex that we have to trust the company’s calculations and estimates. There’s certainly no way that I can analyse the detail of the company’s balance sheet. It just isn’t possible.
Legal & General’s performance under long-term CEO Nigel Wilson has helped make it one of the more popular dividend stocks in the UK. L&G is more profitable than rival Aviva and (unlike Aviva) has not cut its dividend since the 2008 financial crisis.
Looking ahead, Legal & General also looks good value to me. The shares trade on nine times 2022 forecast earnings, with an expected dividend yield of 6.8%. This business is a buy for my portfolio at this level.
A well-timed opportunity?
The company I’m looking at next has not cut its dividend for 30 years, by my reckoning. But the payout will be cut this year. Given this, it might seem strange for me to consider buying this dividend stock today. But I think there’s a good opportunity here. Indeed, this stock may be the next purchase I make for my own portfolio.
The company concerned is consumer health and pharmaceutical group GlaxoSmithKline (LSE: GSK). I’ve always seen this FTSE 100 share as a safe long-term investment, but I think it’s particularly attractive at the moment due to some upcoming events.
This summer, Glaxo’s consumer healthcare business (which owns brands such as Sensodyne and Panadol) will be spun out into a new company called Haleon. The remaining GSK business will become a pureplay pharmaceuticals group.
Why I’d buy the split
Investors who hold Glaxo shares at the time of the split will receive shares in Haleon, so their overall investment will remain unchanged. However, I think the split is likely to create two more focused businesses, with stronger growth prospects. Over time, I expect both stocks to attract a higher valuation than the combined group has at present.
In my view, the main risk here is that the split will reveal weaknesses in one or both of these businesses that will lead to a prolonged period of poor performance. One concern for me is that Haleon — which will assume much of GSK’s debt — might struggle to provide an attractive dividend.
However, I’m reassured by the appointment of former Tesco boss Dave Lewis as chair of Haleon. I do not think he would risk his reputation if he was not confident that he could deliver a good result for shareholders.
I’m also positive about the medium-term outlook for dividends. Although the total dividend paid by GSK and Haleon this year is expected to fall from 80p to 52p per share — giving a yield of just 3.4% — I expect these payouts to rise over time.
In my view, both Haleon and GSK are likely to deliver steady growth over the next decade. For this reason, I’m strongly tempted to add GlaxoSmithKline shares to my ISA portfolio today.
A dividend stock for growth
My final pick is packaging group DS Smith (LSE: SMDS). Although this business carries some cyclical risks, I think it’s a sector that is likely to deliver long-term growth.
Making packaging more sustainable is a big challenge for the coming years. However, I don’t think that the solution will be to get rid of packaging. It’s too much a part of modern life.
Instead, I think the winning operators in this sector will be companies that can innovate and create more efficient and sustainable products. DS Smith has been active in this area. It’s also vertically integrated — it collects and recycles much of the packaging that it produces.
No more plastic
Over the last few years, DS Smith has been expanding its cardboard business while exiting plastic packaging. The company now generates around 80% of sales from the consumer goods sector, which includes retail packaging and e-commerce products.
One risk I can see is that this concentration could leave DS Smith more exposed if consumer demand changes. However, I think some specialist focus is necessary to gain an advantage in such a large market.
On balance, I think that chief executive Miles Roberts has created an attractive business that’s well positioned for growth. I wouldn’t be completely surprised if the company received a takeover bid at some point too.
DS Smith hasn’t updated on trading over the winter, but results for the six months to 31 October looked good to me. Sales rose by 16% to £3,362m during the half year, while adjusted operating profit was 20% higher, at £276m.
When a company’s profits rise more quickly than its sales, this tells me that profit margins are improving. City analysts covering the stock expect to see further margin improvements in 2022/23.
DS Smith shares currently have a forecast dividend yield of 4.2% for the current year and trade on around 12 times forecast earnings. That seems fairly undemanding to me. As a shareholder, I’m happy. I may add to my holdings over the next few months.
