The UK economy shrank in March, and there could be worse to come. And there’s been a tech stock sell-off as investors head for safety. So what am I going to do as we face a toughening economy? I’m sticking with dividend shares.
But I won’t buy just any dividend shares, no. Here are three I’m thinking of buying to help me through a recession.
Not the biggest
I’m keeping away from the biggest FTSE 100 dividend yields right now, because many of them are not well covered by earnings. Some of the biggest payers have also cut their dividends in recent years too.
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BP (LSE: BP) offers a forecast yield of 4.4%. That’s nowhere near the biggest on offer. But what it should provide is strong support from earnings, with analysts estimating cover at around four times.
Oil prices have soared and are sticking above $100, at least for now. That’s led to surging first-quarter profits for BP, strengthening my confidence in this year’s dividend. I don’t think it’s quite a no-brainer buy, mind.
For one thing, the government is increasingly making calls for a windfall tax to cream off some of this year’s profits. And then in the long term, we have that renewable energy thing. There’s long-term risk, but BP is a candidate for me.
Spreading the cash
I am a big fan of investment trusts at any time, but I think they come into their own during economic down spells. There is a risk that a trust will see its share price fall as its holdings drop in value in a recession — in fact, I think it’s almost inevitable.
But trusts can carry over spare cash from good years to keep their dividends going during leaner years, which helps manage that risk.
I’m considering Murray Income Trust (LSE: MUT), which invests in a range of UK shares that I see as safe long-term cash generators. It includes Diageo, AstraZeneca, SSE, and Unilever among its top 10 holdings.
I see that as a nicely diversified selection of dividend shares for a period of recession. Well, actually, I think it’s a solid selection for my long-term portfolio at any time.
Long track record
I’ve often considered adding British American Tobacco (LSE: BATS) to my dividend shares collection. That’s because of sustained profits, strong yields, and decent cover by earnings. But there’s one thing I never realised, until I just recently completed some more research.
Looking back over annual results from BATS, I discovered that the company has lifted its dividend every year for the past 20 years. Actually, the trend might be longer, but that’s as far back as I went.
The company is engaged in a £2bn share buyback programme too. I reckon that means it should have the cash flow to keep the dividend going through any kind of recession.
What’s the downside? Well, it’s the tobacco business. And we could see a big disjoint in performance as smoking gives way to other forms of consumption.
But for my money, these are all dividend shares I’d buy for long-term income.
