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A dividend stock is a stock that regularly pays a portion of profits to shareholders. If I own shares in the company, I am entitled to this dividend. Ideally, I want to own the stocks that pay generous dividends, while maintaining an acceptable level of risk.
Take advantage of the professionals
One area that is offering attractive returns at the moment is financial services. Fund managers and asset management companies catch my eye.
Some examples include Jupiter Fund Management (with a dividend yield of 8.34%), Ashmore Group (7.19%) and Apax Global Alpha (5.96%).
Depending on the specific type of investments I’m looking for, I might decide to choose one or all of the above items to include in my dividend portfolio. By investing in Jupiter, I have access to all of the businesses that manage various funds within it.
Alternatively, Apax Global Alpha is a specific investment fund. It focuses on investing in listed companies.
From my perspective as an income-oriented investor, I don’t mind too much picking a particular fund or a company that manages a lot of funds.
A specific fund will want to pay dividends, as this will likely be specified in the mandate. On the other hand, a fund management company can benefit from the performance of all the funds in operation. This should allow it to pay a dividend based on overall performance.
More dividend stock options
Another part of the market that has attractive dividend-paying stocks is insurance. It’s a pretty broad industry, but two specific examples that I like are Direct line group and Moneysupermarket.com. The current dividend yields are 8.22% and 5.94% respectively.
I recently wrote about Direct Line Group. In the latest results, operating profit rose to £581.8m from the previous year’s figure of £522.1m. Combined with strong expense control, this makes the company an attractive choice for a dividend-paying stock.
I know that insurers operate with low single-digit net profit margins. The tough competition and regulations in the UK can pose a risk as customers can easily change and move elsewhere.
As for Moneysupermarket, it is technically not an insurance provider. Rather, it is a price comparison site that includes searches for home, auto, and other forms of insurance.
I think the travel and home service areas will see strong demand this year as we emerge from the pandemic. However, the company will have problems in the energy area, as the lack of options available due to high prices could hamper the division.
I like the five dividend stocks mentioned and am considering buying them all for my income portfolio. The above-average returns should help me outperform the average of the FTSE 100 and FTSE 250. They could also help me offset the erosion of my cash flow caused by high inflation.