If you are in the market for quality dividends, it's hard to go past Wesfarmers Ltd (ASX: WES) shares and National Australia Bank Ltd. (ASX: NAB) shares.
What makes a good dividend share?
It's important to remember that shares are riskier than most other investments (e.g. term deposits) if you are focused on the short-term and fail to diversify. One of the reasons it's riskier to invest in shares for dividend income is because they are not guaranteed.
What's more, the value of a 5% dividend can be quickly wiped out if the share price falls 10% and you sell.
However, over time, the best businesses on the sharemarket continually generate reliable profits and pay out a rising amount of that profit as dividends to you, the shareholder.
Some of the things you can look for are:
- A large well-known company
- Leading market position
- Diverse operations, across products and geographies
- Low levels of debt
Wesfarmers
Wesfarmers is perhaps the perfect example. It owns Coles, Bunnings Warehouse, Kmart, Officeworks, Target and more. It is forecast by analysts to pay a dividend of 5.1% fully franked.
However, if you want a slice of Wesfarmers' business, you'll have to pay-up.
NAB
NAB, Australia's fourth-largest bank by market capitalisation, is a little different. At their core, all banks are cyclical. Meaning, depending on house prices, unemployment or the broader economy, their profits can swing wildly from one year to the next.
However, banks might also be considered reasonably safe investments because, by design, they are virtually required to make a profit by the government. If our banks did not make a profit, we all would be very concerned.
NAB shares are forecast to pay a 6.6% fully franked dividend.
Foolish Takeaway
Investing for dividend income is best done with a long-term investment horizon and diversified portfolio. Focus on good quality companies but be prepared for the bad times.
In my opinion, NAB and Wesfarmers could be a good place to start. However, I'm waiting for better prices before buying in.
