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UK stocks are well represented in my portfolio. More specifically, I tend to invest in UK-listed stocks because my investment gains won’t be wiped out by currency fluctuations — this is obviously an issue investing in dollar-denominated stocks right now.
Last year wasn’t a bad one for my portfolio. But going into 2023, I want to maximise my returns.
I primarily invest in dividend-paying stocks, rather than growth stocks. That’s because the risk profile tends to be lower. And dividends, albeit not guaranteed, are more reliable than the promise of share price growth.
So where am I putting my money?
Sustainable yields
The first thing I’m looking for is a sustainable yield. It’s normally a warning sign when dividend yields get really big. At this moment in time, anything above 6% or 7% needs should be treated with caution. That’s not to say it’s unsustainable. I’ve just got to be careful.
For example in 2022, as the Persimmon share price fell, the dividend yield almost reached 20%. That’s huge, and it proved unsustainable. The company was forced to cut its dividend payments.
However, there are ways to understand whether a yield is unsustainable. One is the dividend coverage ratio (DCR). This indicates the number of times that a company can pay dividends to its shareholders.
A coverage ratio above two is considered healthy. However, a coverage ratio below 1.5 is a cause for concern.
For example in 2021, Lloyds had a DCR of 3.75. And with performance over the last year being strong, despite a worsening economic backdrop that could influence bad debt. By comparison, Persimmon had a DCR of 1.06 in 2021.
So would I buy Lloyds shares for the 4% dividend yield? Absolutely. In fact, I already have.
Juicier yields
Ok, so the 4% offered by Lloyds is good, but it’s not great. There are a host of companies paying bigger yields. For example, Steppe Cement offers a huge 16% yield. The DCR is alarmingly low, around 1.2. But even if the yield were halved, it would be 8%, and coverage would jump to 2.4.
It’s definitely worth considering. One of the reasons for the sizeable yield is general wariness about investing in small-cap Kazakh cement companies. These weigh on the share price and push the yield upwards. It also took some time for the dividend to be declared, apparently due to tax rules in Malaysia where the firm is actually registered.
The Kazakh economy is expected to see stronger growth than most countries worldwide in 2023 and 2024. So I’m going to keep a close eye on this one and buy at an attractive entry point.
One stock I’ve recently bought more of is Close Brothers Group. The stock recently fell after being downgraded by Canaccord Genuity, noting weakening economic conditions and forecasting reducing demand for financing.
But I see plenty of upside here as a long-term investor — even Canaccord forecasts 18% year-on-year growth in 2025. In the near term, the 7% yield looks attractive, and net interest margins should be pushing revenue higher.
Collectively, by investing in sustainable, yet sizeable yields, I should be able to maximise my returns throughout 2023. I’m aiming for 10%+, focusing on strong dividends, and some share price growth.
