Taking the time to identify the best dividend shares to buy now could be a useful exercise for all passive income investors.
After all, the world economy faces a challenging period that could cause disruption when it comes to shareholder payouts.
As such, finding high-yielding shares with affordable dividends that can grow in the coming years could be a sound move. It may lead to an attractive income return in the long run.
Financially sound companies can make the best dividend shares
The financial strength of a business is likely to have an impact on whether it is among the best dividend shares to buy today. The challenging operating conditions of 2020 could spill over into 2021. As a result, many companies may face threats from weak consumer confidence, rising unemployment and lower levels of business investment that have a negative impact on their financial prospects.
Therefore, buying dividend shares with sound financial positions seems to be a logical approach – especially in the current economic climate. Companies with low net debt levels, or even net cash positions, and significant headroom when making interest payments on debt could offer greater resilience when paying dividends. Similarly, companies that are well within their banking covenants may be less likely to need to cut dividend payouts in order to satisfy their lenders.
Although assessing the financial positions of companies can help an investor to find the best dividend shares, it is by no means a watertight method. However, it can significantly reduce the risk of a disappointing passive income through increasing the reliability of dividend payouts in the coming years.
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Dividend growth potential over the long run
As well as financial stability, the best dividend shares are likely to offer long-term passive income growth. The scale of monetary policy stimulus enacted over the past 12 months means that higher global inflation could result over the coming years. This may have a negative impact on the spending power of investors who are unable to generate attractive growth in passive income from their portfolio.
As such, buying companies that have an attractive earnings growth profile could be a sound move. Higher earnings may mean they can afford to pay a rising dividend that beats inflation. Similarly, businesses that pay out a low proportion of net profit as a dividend may find it easier to raise shareholder payouts in the coming years.
Identifying companies with high earnings growth and low dividend payout ratios may mean obtaining a lower dividend yield today. Such companies could be in high demand due to their impressive future outlooks. However, if they deliver strong dividend growth, they could prove to be the best dividend shares available today for long-term investors.
They may also produce attractive capital returns, as an improving financial performance generally merits a higher share price.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.