The UK economy is currently facing the risk of sliding into recession. Rising energy, food and transport costs are partly to blame. With inflation at a 40-year high, I’m looking at the best dividend shares I could add to my Stocks and Shares ISA.
As inflation soars and recession looms, I want to own shares that best protect me from both. With thousands of shares available, where do I start?
High-yield dividend shares
First, I’ll look for shares that offer an above-average dividend yield. Currently, the FTSE 100 dividend yield is 4%. That doesn’t sound too bad, but I’m looking for something even greater right now.
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Some shares offer yields of over 15%. That might sound appealing at first glance, but I’ll avoid them completely. Very high dividends might not be sustainable and risk being cut.
Instead, I’ll focus on a sweet spot of 5%-8%. But it’s not just about the dividend yields. I like to own reliable companies that have a decent track record of paying consistently. I prefer these shares to those that often suspend dividends.
That’s why I’ll focus on dividend shares that have paid income to shareholders for at least 10 consecutive years.
Affordable dividends
Next, I want to own businesses that can best protect their profits in the face of rising costs. Companies that can pass on higher costs to customers might stand a better chance of thriving in a recession. This kind of pricing power is important, particularly in tough economic times.
Lastly, it’s important that dividends are affordable. I prefer to own shares where dividends can easily be paid from current earnings. To find these, I’ll look for a dividend cover of at least one, preferably more.
Top picks
So are there any shares that tick all of these boxes? Thankfully, there are several. Right now, I’d buy Phoenix Group, Imperial Brands, Vodafone, SSE, BP, Paypoint and Jarvis Securities.
I like to own a diversified selection of shares from different industries. That way, if a crisis hits one sector or company, I can hope to limit my risk.
That’s why my share picks are spread across several industries. They also vary by size. From the tiny Jarvis Securities that has a market capitalisation of just £98m to global giant BP.
At a glance
My top picks have an average dividend yield of 6%. They also have a long history of paying income to shareholders. On average, my group has consecutively been paying dividends for over 28 years.
It doesn’t guarantee that they’ll continue to do so, of course, and all of these shares have their own challenges to deal with. But it gives me some confidence regarding the type of companies I’m investing in.
Lastly, I’m confident that my selection can afford its dividend payments, at least for the foreseeable future. On average, they display a dividend cover of 1.9x. Impressive.
Taking a long-term view, I’d be happy owning all seven of these shares. Overall, I reckon they’ll prove to be a resilient group that will give me plenty of passive income over the coming years.
