The pandemic this year has made it hard for income investors to get a high yield from any dividends paid out. Income investing typically performs better as a strategy when times are good. Higher profits usually correlate to a higher payout ratio of dividends to shareholders. This boosts the dividend yield. But due to falling consumer demand, a lot of firms have cancelled or cut dividends in order to free up cash flow. This makes it more important than ever to carefully select any stock to invest in.
Yet just because dividends are being cut, dividend yields don’t necessarily fall. The other component of the dividend yield is the share price. As the FTSE 100 index is still down in double-digits this year, individual share prices have fallen. For example, if the dividend per share has been cut by 10%, but the share price has fallen by 10%, the dividend yield technically stays the same. This allows us to still find some good options for income investing despite the market conditions.
Buying within an ISA
As a brief tangent before going on, I want to mention the benefits of using a Stocks and Shares ISA. It’s a government provision to allow investors like you and I to invest without paying capital gains tax. Money accumulated within the ISA is not taxed. This is very helpful for income investing, where the dividends can be retained under the ISA umbrella and allowed to stack up over time.
High-dividend-yield stock opportunities
So where would I find high dividend yields for my ISA today? British American Tobacco has seen a share price fall of over 17% from the start of the year. This has helped to boost the dividend yield to 7.78%. There’s currently no sign that the business is going to stop its payout. When looking at dividend cover, the latest figure I could find put the multiple at 1.5. Usually, any number above 1 is a good sign that the firm has enough money to pay the dividend amount from its profits that year. For me, this is a good sign that BATS is a stock to add for income investors.
National Grid had also seen a slump in the share price, but not as much as BATS. A roughly 10% fall year to date has helped to push the dividend yield to 5.66%. National Grid is a utility company, in a sector that typically relies on dividend payouts to attract investors. The firm is unlikely to be tagged as a growth company and so a regular dividend is an important part of its appeal to investors. With this mindset, I think it’s a safe bet to add to my ISA.
Legal & General is a firm that I’ve been a fan of for income investing for a while now. The insurance and financial services provider committed earlier this year to paying out dividends, despite the pandemic. Any firm that’s willing to publicly commit to this is a ‘buy’ in my mind, especially with a dividend yield of as much as 8.87%!
Income investing for the long term
The above examples go to show that income investing isn’t dead. You can still pick up high yields when compared to the base interest rate or Cash ISA rates. This should sit well with investors buying now for the long term.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
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