Buying dividend stocks can be a great choice for investors who want to achieve a passive income. We explain the best stocks to add to your portfolio for a potential yield of up to 7%.
But not all income plays are created equal. Some companies have much better dividend qualities than others.
What’s more, it can be a mistake to buy a stock just because it has a high dividend yield as this can indicate that the market believes the payout is unsustainable.
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Still, there are some companies out there with dividend yields of 7% or more, which appear to have impressive credentials.
Here are three dividend stocks with yields of 7% or more that I think look attractive right now.
The best dividend stocks to buy right now
OSB (LSE: OSB) is a lender specialising in professional buy-to-let and residential mortgages.
The group is one of a handful of so-called challenger banks that emerged after the financial crisis.
With a market capitalisation of around £1.8 billion, it is relatively small compared to the big high street banks, which means it tends to fly under the radar of most investors.
Its size has not held it back.
Since 2016, the group’s loan book and value of customer deposits have nearly quadrupled in size. Meanwhile, operating profit has increased from £163m in 2016 to £465m.
As profits have grown, OSB has been able to return more cash to investors.
Its dividend per share more than doubled between 2016 and 2021 and is expected to hit 35p in 2023, giving a projected dividend yield of 8.3% on the current share price.
Shares in OSB are also selling at what appears to be a dirt-cheap multiple of just 4.5 times forward earnings and a price/book (p/b) ratio of below one.
The stock has been under pressure recently following the now-defunct mini-Budget at the end of September. As a specialist mortgage lender, OSB is highly exposed to higher mortgage rates and possible defaults if borrowers are struggling to meet their repayments.
It seems likely the business will have to deal with loan losses as interest rates rise, but it should also benefit from higher interest rates.
The company reported a net interest margin (the difference between the rate it pays to depositors and charges borrowers) of 302 basis points in the first half of 2022, up from 268 basis points in the same period last year. As this margin expands, it should feed through into OSB’s bottom line.
On top of its rising profit margins, OSB also has a healthy balance sheet with a tier 1 equity capital ratio (a measure of banking solvency) of 18.9%. That’s far above the regulatory and industry minimum which averages the low double-digits.
As dividend stocks go, OSB appears to tick all the boxes.
Tough times present opportunities
The next company on my list of the best dividend stocks to buy now is homebuilder Taylor Wimpey (LSE: TW).
Let’s get the bad news out of the way here first.
Yes, the outlook for the UK housing market is bleaker than it has been for some time.
Rising mortgage costs are pricing a large number of buyers out of the market. On top of this, home prices have been rising consistently for over three decades, and were already at the limits of affordability for most people before mortgage rates jumped.
From a builder’s position, the cost of materials has risen sharply over the past two years. Labour shortages are also plaguing the industry. Then there are planning constraints, environmental rules and the cost of remedial work to remove dangerous cladding from legacy buildings.
Add all of these factors together and you might be asking why anyone would want to invest in the sector.
Well, there are reasons to be positive.
The UK housing market is structurally undersupplied and that is not going to change any time soon. Affordable housing is going to remain in demand, and so is energy-efficient housing.
Taylor’s average selling price of new properties was just over £300,000 in the first half of 2022, slightly above the UK average of £292,000.
This part of the market may be more insulated from higher mortgage costs.
As well as its market position, the business is also flush with cash. At the end of the first half, it reported a net cash balance of £616m.
And then there is the company’s valuation. The stock is currently trading at a forward price/earnings (p/e) ratio of just 4.9 and offers a dividend yield of 9.7%.
I think this valuation is far too pessimistic. Yes, the outlook for the UK housing market is highly uncertain at this point in time, but there will always be a demand for new homes in this country.
Taylor Wimpey’s valuation looks too cheap to pass up.
One of the best dividend stocks with a catalyst
As a former investor in the company, I’m a bit cautious about recommending ITV (LSE: ITV) in this article about dividend stocks. The group has lost its way over the past decade and shareholders have been left holding the bag.
If you’d asked me two months ago if I would like to buy the stock, I’d have said no.
However, in recent weeks reports have emerged that the business is weighing up the sale of its studios division, the jewel in its crown.
It has been said ITV’s management is fed up with the market’s opinion of the group, and they’re looking for options to draw investors back to the stock.
Radical surgery appears to be one option on the table, and it could work. A breakup of the business has been rumoured for some time as the studios business has a much brighter future than the legacy free-to-air television channels.
Indeed, as the free-to-air business tries to fight for market share with companies such as Netflix, ITV Studios is actively working with these companies to help them produce content. That’s why analysts have valued this side of the business at £2bn accounting for around two-thirds of the overall group’s current market value.
The proposed split could put a rocket under ITV shares. In the meantime, the company supports a dividend yield of 7.4% and the stock is trading at a forward p/e of 5.4.
The dividend is covered twice by earnings per share and it looks secure for the time being.
Although a sale or spinoff has not been agreed upon as yet, this could be an opportunity to buy the firm as part of a portfolio of dividend stocks and get paid to wait for a split.
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