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We can earn income by investing in stocks that pay dividends. But choosing these investments can be challenging or difficult for novice investors.
So if I had £10,000 in the bank, where would I invest it? Let's take a closer look.
Food for thought
First, it is important to understand that dividend yields and share prices are inversely related, meaning that as share prices decrease, dividend yields increase, and vice versa.
This suggests that the best dividend opportunities can be found in underserved sectors or markets.
For example, many UK stocks are still cheap on average and offer high dividend yields despite FTSE 100 is approaching an all-time high. The reason? A decade of underperformance and negative investor sentiment.
Second, the relative strength of the pound against the dollar could make US dividend stocks more attractive to UK investors. A stronger pound means investors can buy more dollars, potentially increasing their purchasing power in the US market.
If the pound were to depreciate from here, investors would get more dollars than they bought today.
The caveat is that investors may have to search hard to find large and sustainable dividend yields in the US. Because US stocks have outperformed their UK counterparts over the past decade, dividend yields are generally smaller.
Tick both boxes
One dividend stock worth considering is listed in the US Nordic American Tankers (NYSE:NAT) paid a dividend of 12.9%.
The company operates a fleet of 20 Suezmax oil tankers and has been reporting healthy EBITDA and cash flow margins due to strong day-to-day costs for chartering its vessels.
Daily prices increased due to lack of supplies and due to rescheduling following the Red Sea shipping attacks.
With equal time charter rates over $35,000 per day and daily operating costs of $9,000 per vessel, you can see why I'm bullish.
In addition, industry trends suggest continued demand and moderate supply growth through 2026, supporting the likelihood of continued high day prices.
However, I appreciate that stocks can be easily swayed by economic data, such as weak Chinese or US economic growth and oil demand.
However, analysts estimate a total return of 15-20% over the next 12-15 months, making Nordic American an attractive option for income-oriented investors.
The chart below shows the price — as well as the average, high, and low price targets — and the historical dividend yield.
Diversity is key
As I like Nordic American, it is very important to keep a diversified portfolio, so investors should consider different stocks in different sectors.
This can include, say, Greencoat UK Wind renewable, Phoenix Group in insurance, Lloyds banks, Rio Tinto mining, BT Group in communications, and GSK at the pharmacy.
These are just opinions, but if I were to invest in these six stocks, along with Nordic American, I would have a very diverse portfolio of dividend-paying stocks.
Overall, these investments, if spread evenly, will return around 6-7% per year. That's not really a bad return.
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