The dividend investor’s checklist

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

Whether you’re eyeing up a relaxing retirement or you fancy a steady stream of investment income to help pay the bills alongside your salary, the stock market might be able to help.

This quest for income isn’t new but, after a post financial crash backdrop of rock bottom interest rates, the world has changed. Suddenly, income investors are having to rethink their asset mix in a context of higher inflation and higher interest rates, and explore options they maybe haven’t touched in over a decade.

To make that job slightly easier, let’s have a look at some of the most common tools in your income toolkit and help work out if they’re right for your portfolio.

During the interest rate wilderness of the pre-Covid era, investors were starved of decent income from bonds and cash. It meant many were willing to climb the risk ladder and invest in stocks paying out regular dividends instead.

Source: Office for National Statistics, March 2025.

The goal here was to buy stocks with solid, predictable earnings, with attractive dividend yields vaguely equivalent to lower-risk bonds, hence the ‘bond proxy’ nickname this group of large, global stocks took on.

It’s not a bad company profile to look for, and is still popular now, even with higher yields on cash and bonds.

The important thing to look for when you’re searching for dividend income is consistency. If a company has a steady track record of paying, and growing, dividends as well as a clear policy to keep doing so, you’re off to a good start. Keep an eye out for firms with relatively predictable earnings, stable cash flows and business models likely to withstand whatever the market throws at it next.

Read more:

- Inflation and investing to beat it

- How much do you need to earn to be rich?

- ADRs & investing in UK stocks on Robinhood

These types of companies might not shoot the lights out with their share price performance but they shouldn’t slump out of nowhere either. Remember, dividends are paid out of profits so the company still needs to be ticking along and making money too. If it’s standing still or likely to struggle, the dividend is often the first casualty.

Sectors like consumer staples, utilities and healthcare are traditionally known for their dependability here, as well as energy and financials. Business cycles will naturally change how attractive they are and there are never any guarantees in investing but, regardless of sector, investors tends to like repeatable earnings not tied to any particular market environment.

It’s easy to get all googly-eyed at the biggest dividend yields out there but you have to make sure the company is actually in a position to pay it. Look a bit closer and that monster yield might be revealing a problem rather than an opportunity.

For example, let’s say company X’s shares are priced at 100p with a 5p dividend, giving it a 5% dividend yield. Unfortunately, the market doesn’t like company X’s results and sends its shares down to 75p. That 5p dividend is now a 15% yield, which might look mouthwatering if it weren’t for the fact the share price just cratered.

This is why it always pays to lift the bonnet and examine how healthy the engine is underneath. Even if the company can avoid chopping down its dividend in the short term, can it really sustain it over the long haul?

It’s why it’s also a good idea to check a company’s dividend cover. This measures how much cash there actually is to pay the next dividend so you’re looking for at least a reading of 1x, if not a little more for peace of mind.

Luckily, there is a way to keep tabs on the most consistent dividend payers out there. To get into the select group of dividend aristocrats in the UK, a company must have held or raised its dividend for at least 10 consecutive years. In the US, your ticket to the dividend aristocrat party will cost you 25 years of increased dividends. As of Q1 2025, the guestlist this side of the pond included NatWest, insurer Legal & General and Warhammer owner Games Workshop. Stateside, you’ll find names like Coca-Cola, PB&J giant JM Smucker and band-aid to Benadryl manufacturer Kenvue.

The dividends on offer might not have you jumping for joy but factor in the growth element that a lot of them have achieved and you start to see how companies try to strike the balance. They still need to grow at the same time as keeping income hunters happy, which means reinvesting some of their profits back into the business as well as keeping some aside for regular dividend payouts.

In the UK, investment trusts are also a popular choice for dividend fans. These funds hold a range of shares and are listed on the stock market, like an exchange-traded fund (ETF), with the exception that they have a human at the helm choosing the stocks for the portfolio. They invest for the super long term and come with the added benefit of being able to squirrel away 15% of their income in the bumper years to be able to smooth out dividend payments in drier times. Covid showed us just how valuable that ability is, as firms stemmed payments for fear of revenues running thin.

If you were a retiree counting on that income, you would have seen it stop dead in some cases, with no clue as to when it might return. UK investment trusts were able to dip into their dividend reserves, with around 70% of UK equity income investment trusts managing to maintain or increase their dividends during the first year of the pandemic, according to the Association of Investment Companies (AIC).

AIC dividend heroes

Investment trusts have their own elite group, whose clubhouse demands an entry fee of consistently increasing annual dividends for at least 20 years in a row. Remarkably, half of the current list have managed to raise their dividends for 50 consecutive years or more.

Source: theaic.co.uk, Morningstar, as at 13 March 2025.

Real estate investment trusts (REITs) for dividend income

Investors are likely familiar with the concept of creating an income stream by renting out a property but we tend to think of the residential side of the market. Real estate investment trusts (REITs) focus more on commercial property, vast warehouses or large developments of homes, pooling investor capital to buy and manage projects, and distributing income from them. Importantly, REITs are required to pay out at least 90% of their taxable income through dividends to investors, which makes them an attractive option for a lot of income-hungry investors.

These aren’t the only routes to achieving investment income but, where equities are involved, they are some of the most common. If you are thinking of incorporating them into a wider income-focused portfolio, here are five key tips to consider:

1. Diversify income streams across asset classes. When the dividend taps get clogged, investors need to be sure it doesn’t completely stunt their overall income. That means making sure you are gathering income and interest from various sources including bonds, cash and stocks, for example. Even within your stock holdings, make sure you are diversified across geographies, sectors and company sizes. The goal here is to be able to cope with a hit if one of your income sources suddenly faces problems.
2. Pay attention to investment risk profiles. Bonds might generally come with a lower risk profile than shares but dig into what you might be buying. The higher the bond yield on offer, the greater the chance of default risk, generally speaking. A less stable government or company has to entice you with a higher yield, so make sure you decide on the balance that suits you, rather than chasing after double-digit interest from a troubled lender.
3. Rebalance your income portfolio regularly. Some people do it every six months, others do it annually. The important aspect is to check in on your portfolio to make sure natural investment growth hasn’t meant one asset has become the beating heart of your income stream. This doesn’t mean punishing your best performer, it just means making sure you aren’t overexposed to a particular payer which could ruin your income if things go south.
4. Dividend clumping is real, avoid it. If you have a look at the top 10 holdings in a lot of equity income funds, you’ll likely see the same names popping up. An inexperienced or pushed-for-time investor might skip this stage and end up investing in a few very similar funds in a bid to diversify their income streams. The result would be the opposite, concentrating their holdings across a few funds rather than spreading risk. If you are looking at investment trusts or income-focused ETFs, make sure you know what you’re buying.
5. Don’t forget about capital growth. In all the excitement about generating income, don’t forget that the driving force behind them needs to keep going too. Low-growth companies might concentrate on payouts but they shouldn’t be declining as a result. Similarly, higher growth companies might have an unimpressive yield on the surface, until you factor in the better capital growth they deliver. It’s all about balance and one number will never tell the full story. In short, make sure the overall blend of capital growth and income paints a picture you’re happy with.

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.