I think dividend stocks can be a helpful tool for generating income, although as dividends are paid out of company profits, I do not view it as a guaranteed income stream.
Companies may have to reduce or eliminate their distributions if profits collapse.
Still, I am comfortable with this level of risk.
Should you invest £1,000 in Wizz Air right now?
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Here are three dividend stocks with yields of 6% I would buy today.
Income champion
The first company on my list is the life insurance and pension consolidator Phoenix (LSE: PHNX).
The group’s business model is based on the idea that size is everything. It buys up books of old pension and life insurance policies from other companies and then consolidates them.
Using this approach, Phoenix can reduce costs and generate positive cash flow. Management can then return some of this additional cash flow to investors.
At the time of writing, the stock supports a dividend yield of 6.8%. That looks extremely appealing to me in the current interest rate environment. The company has scope to acquire more books of business as we advance, which suggests to me the dividend could grow further in the years ahead.
That’s why I would buy the company for my portfolio dividend stocks today.
However, this stock might not be suitable for all investors because it has a complex balance sheet. A change in interest rates or regulations could reduce the amount of money the company can return to investors. This could force management to cut the dividend.
A champion of dividend stocks
Another company I would buy for my portfolio is the telecommunications giant Vodafone (LSE: VOD).
This company currently offers a dividend yield of 5.9%. Analysts expect the payout to increase in the next financial year, which could leave the stock with a yield of 6.1%. I should note that this is just a projection at this stage, and the increase is not guaranteed.
Still, I’m excited by the firm’s potential. Vodafone has been investing heavily in its infrastructure over the past few years, which has helped reinforce its position as one of Europe’s largest telecommunications companies. I think this should help underpin the group’s growth as we advance.
Key risks to the company’s dividend include a need for higher capital spending. This could force management to divert cash away from the payout into new telecoms equipment. The company also has a lot of debt, which could become problematic if interest rates rise.
Profit growth
The final company I would buy for my portfolio of dividend stocks is steel and iron ore producer Evraz (LSE: EVR).
The global demand for steel is rising as companies and governments try and spend their way out of the coronavirus crisis. This could lead to rapid profits growth for the group in the year ahead. Based on current growth projections, analysts believe the stock could support a dividend yield of 6.9% in the current financial year.
This enterprise is a bit riskier than the other businesses highlighted above. Its income is linked to economic growth and commodity prices, both of which can be volatile. That’s why the company’s dividend yield is currently so high. Some investors would clearly rather not own Evraz.
Still, I would buy the company for my portfolio of dividend stocks based on its dividend potential.
