The best dividend stocks for 2021 may not necessarily be those companies with the highest yields. Certainly, a generous passive income is likely to be attractive in 2021, but affordable dividends and the prospect of growth may be equally important.
As such, searching for strong businesses in sectors that are currently unfavoured by investors, but that have long-term growth opportunities, could be a sound strategy to find the best income shares for 2021.
Dividend stocks with high yields
Dividend stocks with high yields may be more common in sectors that are currently unpopular among investors. They may have experienced share price falls since the start of the year. If they have maintained, or even increased, dividends then this may have resulted in them offering high income returns at the present time.
High-yielding dividend shares could become increasingly popular among investors in the coming months. Low interest rates look set to remain in place for an extended period of time. This could mean that income stocks with high yields are a relatively rare opportunity to generate inflation-beating income returns over the medium term. As such, dividend stocks with high yields could experience high demand that means they offer impressive capital gains to complement their passive income prospects.
Dividend affordability in 2021
The outlook for dividend stocks is very uncertain. Risks such as the coronavirus pandemic look set to remain in place for at least part of 2021. As such, the economic outlook could continue to be very challenging across a number of different sectors.
This means that dividend affordability may be crucial for any investor seeking to make a passive income. Therefore, checking a company’s financial position may be more important than ever. It can provide guidance as to the affordability of dividends should operating conditions worsen.
Information on the debt levels and interest cover of dividend stocks can act as a guide in assessing their financial strength. Meanwhile, dividend cover provides guidance on whether a company could withstand a drop in profitability when it comes to paying dividends. Ensuring a business has headroom when making dividend payments could be a prudent approach ahead of what may prove to be an uncertain 2021.
Dividend growth potential
As well as high yields and affordable payouts, dividend stocks with growth potential could be worth buying for 2021 and beyond. Companies that can grow dividends at a pace that exceeds inflation may become more popular in the coming years. This could mean they produce strong capital growth.
Clearly, assessing a company’s dividend growth prospects is tough at the present time. Shareholder payouts are closely linked to the outlook for profitability. However, by investing money in sectors with sound track records and clear opportunities for growth, it may be possible to find the most attractive income shares that deliver the highest returns in 2021 and in the coming years.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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