I already own several dividend shares in my Stocks and Shares ISA. But I plan to buy some more in 2023.
That’s because in addition to providing stable income, these shares offer defensive characteristics. For instance, as they can afford to distribute cash to investors, they tend to be profitable businesses.
Finding the right shares
When looking for which dividend shares to buy, I look for some key features. First, I like to see a strong dividend yield. But what does that mean?
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
The average yield for FTSE 100 shares is currently 3.7%. But several large-cap companies yield 6% to 10%. That would be my target range.
Next, I’d consider if the company can afford to make these payments. Dividend cover is the metric that I tend to use for this. It shows how many times a dividend can be covered by its earnings.
So a cover of two implies the business can afford to pay double its current dividend from its net income.
Next, I’d look for a multi-year dividend history and as a bonus I prefer to see consistently growing dividends.
Although I can see dozens of suitable candidates, I’ve narrowed down my list to three shares that I’d buy today.
Phoenix Group
Sometimes the best dividend shares can be unfamiliar, quiet and boring businesses.
I reckon Phoenix Group Holdings could be described in this way. This savings and retirement business is relatively unknown to many, despite being listed on the Footsie.
That said, it offers a solid 8% yield, dividend cover of 1.7 and 13 years of consecutive payments. It also benefits from consistent dividend growth.
Phoenix has a relatively stable business of pension and insurance products. Growth is likely to be limited though, in my opinion. But as a slow-moving dividend share for regular income, I’d still buy it today.
Imperial Brands
Another share on my list is consumer defensive business Imperial Brands. In times of economic uncertainty, I prefer to own companies that aren’t very cyclical. That means those that don’t swing up and down with the direction of the economy.
As a predominantly tobacco business, Imperial firmly meets that description. Its customers are sticky and tend to stay with their chosen brand.
That makes it highly cash-generative and allows for a chunky 6.5% dividend yield. With 26 years of back-to-back dividends, and a comfortable cover of 2, it’s exactly the type of share that I’d buy.
Legal & General
Finally, I’d buy Legal & General Group. This multinational financial services provider was founded in 1836. It has firmly established itself as a leading provider of retirement, investment and insurance services.
Given its background, I’m not too surprised to see 30 years of consecutive dividend history. Currently, it offers a 7% dividend yield and cover of 1.7.
Like Phoenix Group, its growth could be somewhat limited. As such, its share price gains over the coming years are also likely to be limited, in my opinion. That said, I’d still buy it for its strong and reliable dividend.
If I buy all three shares today, I’d expect to receive 7% in dividends this year. On a £20,000 Stocks and Shares ISA, that equates to around £1,400.
