Building a portfolio of dividend-paying stocks can be a good idea when targeting long-term gains. But not all dividends were created equally. And it’s wise to research companies with care before choosing stocks.
One of the dangers is that businesses with a high dividend yield can sometimes find it difficult to maintain their shareholder payments. For example, that can be true of enterprises with cyclical operations, but not always. Nevertheless, in some cases, a high yield can be a warning sign instead of an attractive feature of a stock.
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’.
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Robust financial records
One way of aiming to mitigate the risks is by looking for a long record of dividend payments. And ideally those multi-year shareholder payments will be backed with strong incoming cash flow. When choosing dividend stocks, it’s desirable to find an underlying business with a record of rising revenue, earnings, cash flow and shareholder dividends.
However, all stocks come with risks as well as positive potential. And that’s because any business can run into operational difficulties from time to time. Nevertheless, there are some companies worth considering for further and deeper research right now.
For example, Unilever. The business makes branded and packaged consumer goods, including food, detergents and personal care products. And the company’s dividend history stretches back decades.
There’s good backing from cash flow for dividend payments. And the business is known for its defensive and less-cyclical characteristics. Meanwhile, with the share price near 4,114p, the forward-looking yield is running just below 4% for 2024.
And Moneysupermarket.com looks like a cash-cow business these days. The company runs comparison sites for insurance, money, home services, and other products. And the cash flow record has been strong over the past few years.
Meanwhile, there’s a decent record of shareholder dividend payments. And the directors kept them up right through the pandemic, which seems like a sign of business strength.
With the share price near 241p, the forward-looking yield for 2024 is just above 5%. And that’s an attractive level considering the payment is forecast to grow in the years ahead.
Potentially enduring dividends
But another business likely to grow its dividend is financial technology and trading platform company IG Group. The multi-year record for revenue, cash flow and dividends is robust. And IG is kept paying out to shareholders through the pandemic.
With the share price near 822p, the forward-looking yield for the trading year to May 2024 is running at around 5.75%.
Those three are examples of businesses that potentially have enduring dividends because of the defensive nature of their operations. But they are not the only stocks worth considering for a dividend-paying portfolio right now. And there’s no guarantee they’ll go on to perform well just because they look attractive now.
Nevertheless, they’re all worth further research with a view to holding them long-term as part of a diversified portfolio focused on income.
