Hunting for dividends in the Goldilocks zone

It goes without saying that dividend investors want a reasonable yield, but what is reasonable? 

Some investors are happy with yields of 2% or less because they believe high growth tomorrow will more than compensate for a low yield today. But for investors who want a decent income today, 2% is unlikely to be enough for all but the most wealthy.

At the other end of the scale, some investors will only invest in high yield opportunities, aiming for something close to and preferably above a double-digit yield. At first glance this seems like a no-brainer, but don’t forget that dividends are not guaranteed and promises of double-digit yields are often followed by the reality of dividend cuts and suspensions.

For most dividend investors then, looking for shares where the dividend yield is in the Goldilocks zone (not too high and not too low) is sensible. Of course, what is too high or too low is subjective, but I think something in the range of 4% to 8% is a good starting point.

So in this month’s Master Investor magazine, I decided to focus on a couple of FTSE All-Share companies, both of which have more than ten years of unbroken dividend payments and a starting dividend yield north of 4%.

Hunting for dividends in the Goldilocks zone

Coronavirus and the 2020 stock market crash

Market prices are changing with incredible speed at the moment, so any mention of share price in the article above is now likely to be very wrong.

Also, the FTSE 100 is now at 5,400, with a dividend yield of more than 6%, so what constitutes a “high yield” stocks is now something with a yield of more than 6% rather than 4%.

Having said that, as of this morning my preferred stock from the article has a dividend yield of 8%, so it’s still clearly a high yielder.

And more generally, here are my thoughts on the Coronavirus Crash.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

5 thoughts on “Hunting for dividends in the Goldilocks zone”

  1. A theme on which I’d enjoy reading more articles is individual companies with fallen share prices but attractive fundamentals.

    When studying the history of market crashes and panics I learn that good companies are sold indiscriminately.

    Hindsight is wonderful but too late to participate in the opportunity. Since we have panic now (12% drop yesterday), where are the current opportunities?

    1. Hi Ken, one of the companies in the article has a yield of more than 8% and good fundamentals (in my opinion), so that’s a start!

      I’ll be doing more company reviews once results season is over, as reviewing the annual results of 20 or so of my holdings has taken up most of my time in recent weeks.

  2. Hi John,

    Just read a report from FCA banning companies from publishing their preliminary reports. I think it will make it more difficult to assess the materiality of some companies.

    Personally I’m going to just reinvest my dividends in my current holdings they have been undervalued so why bother looking to invest in something I don’t understand in?

    I would say to anyone investing to know their company because the way the market is behaving is both irrational and rationale at the same time. Certain companies will be thriving in this current climate such as supermarket on the other hand airline companies and energy company face an existential crisis because of aversion to flying, oil wars and etc.

    However does it make sense for Tesco stock to be punished along with Easy Jet? In fact I would wager that the turnover and profit for every individual store of Tesco is probably going up. Obviously this is a freak situation and not sustainable for the long term but Tesco seems to be punished with every other stocks in the market when its going to be making a heft profit.

    1. Hi Reg

      It’s no so much a ban as a request to delay publishing results so that the auditing process can be carried out, which is taking longer than normal for obvious reasons.

      As for investing in general, I think unless you’re Buffett this is a time for caution and diversification rather than bold stock picking, although as you say it seems unlikely that people are going to stop eating or using toilet paper anytime soon, so Tesco etc should be okay, in theory.

      1. Hi John,

        I must have misread it.

        I’ve often wondered how to construct a robust portfolio and in my opinion you can only do that if you have a margin of safety? My interpretation of a company with a margin of safety is something that has big profit margin.

        This gives the company significant cushion to ride out difficult times like this. Unfortunately its very difficult to find companies like these which are undervalued. As a result my portfolio is extremely concentrated.

        However thank you for the advice because I will definitely act with caution in such volatile time!

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