Dividend stocks are an excellent way to earn some passive income, in my opinion. But it can often be a minefield deciding which shares offer the best reliability and long-term potential.
Looking at a stock’s history is one way to see how it’s behaved over time. For instance, shares that have been paying dividends for many decades might suggest management has a long-standing payout policy.
But bear in mind dividends aren’t guaranteed. Companies can cut or suspend payments if they see an upcoming risk to earnings. This was common during the pandemic in 2020.
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!
8% yield
One dividend stock that’s managed to consistently pay dividends for over 30 years is Aviva (LSE:AV.). This FTSE 100 insurance and retirement business currently offers a whopping 8% dividend yield.
Although frequently looked at by investors, the yield isn’t the only factor to consider. I’d also look at how affordable payouts are. Aviva has a dividend cover of 1.8.
This measure shows it can afford to pay 1.8 times its current dividend from earnings. That sounds like a good buffer to have.
I’d also consider how a business is faring. In this instance, it looks to be showing positive momentum. In its last update in March, the insurer announced that operating profit was up by 34%.
As a result, it also announced a boost in dividends to 31p for the year. That’s 41% higher than the prior year. As a dividend investor, that sounds reassuring.
Often overlooked
Another factor I particularly liked was its £300m share buyback. These are often overlooked by many investors as the immediate effect isn’t as apparent as dividends hitting the brokerage account.
But when a company buys back its own shares, it reduces the number of shares in circulation. And as a result, the value of the shares climbs.
Bear in mind there are still macro-economic uncertainties, particularly in the finance sector. Aviva is unlikely to be immune to these risks.
That said, its solid 8% dividend yield is too good to let go. If I had spare cash, I’d buy this dividend stock today.
Bricks and mortar
Another dividend stock that I’d buy is UK housebuilder Bellway (LSE:BWY). It might seem strange to be looking at this sector’s stocks right now, given higher interest rates and a cost-of-living crisis.
But given the fall in share prices here over the past couple of years, a housing downturn appears to be priced in.
It currently offers a 5% yield that’s more than covered by earnings. Like Aviva, it also has more than 30 years of dividend history.
With a price-to-earnings ratio of just 7, this dividend stock looks cheap to me.
Sector recovery
Recent data from Nationwide Building Society shows a modest improvement in house prices. It comes as the number of mortgages being approved rose.
It’s worth noting that it’s a seasonally strong time for the market, and uncertainties remain. If inflation doesn’t fall later in the year, higher interest rates could be on the cards. And that would not be good for this sector, in my opinion.
That said, given the well-covered dividend yield and history, I’d buy this stock today if I didn’t already own another stock in this sector.
