What I look for in a good dividend share

Though an individual’s needs may vary, Karl Loomes has some solid guidelines when looking for a good dividend share.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investments styles and requirements are as varied as individual investors themselves. One person’s perfect stock is another’s worst. However, in both growth and income investing, there are general principles always worth considering. Here are some things I look for in a good dividend share.

Try to reduce risk

If investing with income as the main goal, risk to the initial capital should be at the forefront of one’s mind. A good dividend share is one that maintains, or preferably increases, the capital invested.

From a practical standpoint, this usually means looking at large, well established firms. Companies with a strong brand and a long history, like those in the FTSE 100, are generally seen as having a lower risk profile.

Of course this alone is not enough. It is always worth looking at a company’s finances. I look for a steady history of increasing revenue and profit. Depending on the sector, lower levels of debt are usually a positive as well.

Not only does this help mitigate the risk to the invested capital, but should help establish a firm’s ability to pay dividends now and in the future. If a company has poor finances, should it really be handing out cash to investors?

Dividend paying history

Past performance in no way guarantees performance in the future. Nevertheless, I think a company that has historically paid steady dividends is usually a better choice that one with a spotty record of dividend payments. Consistent payouts, over say the last five years, can indicate a firm’s commitment to its shareholders.

Coupled with this, I think it is always worth looking for dividend growth. A company that has seen its revenue and profits increase year on year, should be able to increase its dividends each year as well, in my view. At the very least a good income share should see dividend growth above inflation.

A good dividend yield

Yield is considered by many to be the most important aspect of a good dividend share. I think has to be considered in context. For anyone who is unsure, a company pays out dividends on a pence-per-share basis. This means that the percentage return on an investment – the dividend yield – is based on the share price at that time.

This can be both good and bad. Classically investors will try to buy a share when its price is low for good growth prospects. From an income perspective, investors are also able to ‘lock in’ a good dividend yield if a share price is low.

Of course the reason the share price is low is critical. If a company is fundamentally suffering, the low share price may be too risky. However, there are often many reasons why a company’s share price will be lower than its fundamentals warrant. Fear and greed are key drivers behind share prices, and neither of these emotions is dependent on hard facts.

As I began by saying, the true measure of a good dividend share is one that suits the investor’s needs. However when investing for income, I think these general guidelines are a very good place to start.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »