The five dividend stocks to buy (and the ones to avoid)

Telegraph

17-03-2025

The FTSE 100 may continue to disappoint investors looking for high-growth companies, but it remains a haven for those in search of dividends.
Whether you want to supplement your income in retirement or boost your returns by reinvesting the payouts in more shares, dividends can form an important part of any portfolio.
However, unlike interest earned on a savings account, dividends are not guaranteed – which is why choosing stocks requires extra thought and care
Telegraph Money has picked out five of London's most compelling dividend stocks to add to your portfolio.
Legal & General
Yield: 9.1pc
Legal & General is a popular choice among income investors for good reason. It is one of the highest-yielding stocks in the FTSE 100 and has not cut its dividend once in the last decade, which bodes well for future payouts.
That said, its share price has slumped 24pc over the past five years as inflation and higher interest rates have caused trouble for its investment management division.
However, its shares were buoyed recently by news of the recent sale of its US unit for $2.3bn to Japanese mutual life insurance company Meiji Yasuda.
Shell
Yield: 4.3pc
Shell recently raised its dividend by 4pc despite a 16pc drop in profits last year.
The energy giant was hit by weaker oil and gas prices and lower demand in 2024, yet it still revealed another $3.5bn share buyback and a $4.7bn reduction in net debt at its recent full-year results, demonstrating its resilience even in difficult trading environments.
Richard Hunter, of stockbroker Interactive Investor, said: 'As a stock, Shell faces the additional challenge of being in a sector which is the focus of some debate from an environmental perspective, with the ever-increasing possibility that some investors will be unwilling or unable to invest in the sector on ethical grounds.
'However, the group's diversity of operations across oil, gas, chemicals and alternatives regularly results in different areas of the business picking up the baton as others face more difficult times.'
Hargreaves Services
Yield: 5.9pc
Hargreaves Services provides services to the industrial and property sectors. Its shares are not as cheap as they once were after strong half-year results piqued investor interest. The group reported revenue of £125m in the six months ended November 2024, up from £110m in the same period of 2023.
Russ Mould, of stockbroker AJ Bell, said: 'That plump yield means investors can wait patiently for Hargreaves Services to optimise returns from its multi-year infrastructure deals and land bank, where it regenerates brownfield sites for commercial or residential property development.'
Assura
Yield: 7.4pc
Real Estate Investment Trusts (Reits) have been out of favour of late as higher interest rates have hit commercial property prices.
But this FTSE 250 member has increased its annual dividend more than 10 times in a row. It specialises in leasing healthcare properties like GP surgeries and treatment centres, which has given it a history of generating reliable rental income to pay dividends for shareholders.
Last year its £500m acquisition of 14 private hospitals in Canada diversified the portfolio. This did push its net debt to £1.6bn but Assura hopes to reduce this through property disposals.
Phoenix
Yield: 10.8pc
Phoenix finished 2024 with the highest forward yield in the FTSE 100. Last year the savings and retirement business, which also owns Standard Life and SunLife, pledged to support a 'progressive' and sustainable dividend policy.
Garry White, of wealth manager Charles Stanley, said: 'Phoenix has attractive cash generation prospects, a sensible management team and good growth prospects of its open business, which manufactures and underwrites long-term savings and retirement products.
'The insurance firm specialises in buying up closed books of life assurance policies from other insurers. These are portfolios of policies that are no longer being sold but still need to be run until completion. With this focus comes economies of scale that make Phoenix a consolidator of choice. It also means that the group has good visibility of earnings.'
Red flags for dividend stocks
Mr White said it is important not to just choose stocks paying the highest yields.
'Sometimes this is a sign of distress. If the share price has fallen because the company is in difficulty, the dividend may be unsustainable.'
Instead you should look for companies with a history of maintaining or increasing their dividends.
Mr Mould said income investors may wish to measure the forecast dividend yield against four benchmarks to see if the returns on offer are worth the potential risks. These are: ten-year gilts (currently 4.63pc), rates on cash (around 5pc), inflation (3pc) and the wider equity market (currently a 3.4pc yield for the FTSE All-Share).
He said: 'If a share offers a dividend yield near or above some or all four of these benchmarks, it may well be a worthy contributor to the income part of any portfolio.'
Pay close attention to dividend cover. This is a company's ability to pay dividends out of profits. It can be calculated as prospective earnings per share (EPS) divided by prospective dividend per share (DPS).
A dividend cover of 2x is generally considered healthy. Anything below 1.0 could be cause for concern, unless the company has good cash flow and a strong balance sheet, or is a Reit, meaning it has to pay out 90pc of its earnings to maintain its tax status..
You want to check not just how profitable the company was in the most recent year but whether it has been consistently profitable over the last few.
Mr Mould said: 'Company earnings can swing around, depending on their business model and how cyclical it is. Looking at average earnings cover over a decade gives a better feel for how well defended the dividend would be were something to go unexpectedly wrong.'
Other things to look at are operating free cash flow – net profit after capital expenditures – and a strong balance sheet. Watch out for high debt as well as leases and pension deficits as these must be paid and topped up.