There’s no shortage of stocks offering high yields at this moment in time. But that won’t last forever. As we know, dividend yields are inversely correlated with share prices. In other words, when share prices fall, dividend yields go up.
And right now, in the UK at least, share prices are broadly down. This is demonstrated when we look at the FTSE 350‘s performance over five years. It’s down 3%. Let’s take a closer look at what’s happening and explore my top high-yielding dividend stocks.
A rare opportunity
When the stocks market dips, I’m not only looking for cheap stocks where I can realise share price growth, I’m looking for bigger dividend yields.
But the market doesn’t always act in unison. So I’m looking for high yields in depressed parts of the market, including housing, banking, insurance and mining.
Naturally, the market tends to be cyclical, and share prices aren’t depressed forever — unless the company is on its way out.
Moreover, I can see that despite the challenging economic backdrop, earnings have largely held up. And the economic forecast does appear to be improving.
So these knockdown share prices won’t be here forever. I feel investors need to buy in while the opportunity is there.
Sustainability
Sustainability is key when it comes to dividend yields. The last thing I want is to see a dividend yield cut, or cancelled, because it’s unsustainable.
That’s why I and other investors need to assess whether dividend yields are big because the company is in danger, or because the market undervalues the stock — the latter is what we want to be buying.
When looking at a dividend yield, we can start by assessing whether the companies cash flows are stable. Some stocks, like those in the pharma industry, might earn very little while products are in development, but lots when these treatments get the green light.
Companies with regular and stable cash flows tend to have more stable dividends.
We also need to look at the dividend coverage ratio (DCR). This measures the number of times a company can pay shareholders its announced dividend using its net income — anything above two is considered healthy. But companies with strong cash flows can have lower DCRs.
My picks
Some of the best yields can currently be found in the insurance sector. But dividend coverage can be a bit lower here. I’ve bought all three of these stocks, Aviva, Legal & General and Phoenix Group. They offer dividend yields of 7.6%, 8.1% and 9% respectively. These are huge, and they’re supported by strong cash flows.
Housebuilders are also a great place to look for yields. But with interest rates continually pushing upwards, I’m picking the safest of the bunch, Vistry Group. This housebuilder has a sizeable, affordable homes unit, providing insulation from the volatility of the private market.
And with the exception of Standard Chartered, all major UK banks are offering attractive yields right now. Barclays and Lloyds have coverage of 3.1 and 4.25, suggesting the dividends will grow in the coming years too.
