How to avoid dividend traps – Plus, 3 dividend stocks to consider

Legal & General (L&G) is an insurance and investment juggernaut, with operations in pretty much every service within those buckets.

Income is a key part of the investment case, with L&G sporting an attractive forward dividend yield of 9.3%.

The recent sale of its US protection business for £1.8bn means there’s also potential for more capital to be returned to investors through share buybacks.

Business performance has largely been positive of late. Growth in its retail and institutional divisions helped to offset some slight weakness in asset management, keeping profits moving in the right direction.

Pension risk transfers are key to operations. This is where L&G takes on responsibility for paying some or all of the pensions from a company’s final salary pension scheme (often called bulk annuities).

In return, the group receives a lump sum of cash today, which it invests. The goal is to earn a higher return on investments than the future cost of pension payouts and any operating costs.

L&G’s different operating divisions complement each other well, giving it a solid chance of winning new business, benefiting from scale, and ultimately meeting this goal.

Tariffs have sent shockwaves through global markets. That’s likely to weigh on investment returns, so we could see some softness in the near term.

Investors should take some comfort in the fact that L&G has a proven track record of managing market risks, although of course there are no guarantees.

The balance sheet is also in great shape, which means there’s some cushion if things get worse.

With the mature UK market being its biggest region, L&G is setting its sights on growth further afield. The new partnership in the US could unlock major value down the line, but there's a lot of work to be done before we really start to see those benefits.

The valuation is in line with peers, which looks attractive to us given the number of strings to L&G’s bow, and shareholder return plans. Increasing overseas exposure looks like the obvious route to growth, but it brings execution risks along with it.

When looking to avoid dividend traps, finding businesses with relatively reliable revenue streams is a great starting point.

National Grid fits that bill.

It owns and operates essential energy infrastructure across the UK and north-east US.

With the energy landscape changing fast and global demand rising, National Grid’s attempting to plant itself at the centre of the electric revolution. Its investment in energy infrastructure is set to rise significantly to around £60bn over the five years ending March 2029, nearly double the investment over the five years before.

To help fund these plans, a number of its assets that don’t fit the new strategy will be sold off.

The group also raised nearly £7bn of funds by issuing new equity last year, to help prevent pressure building on the balance sheet.

As a result, the balance sheet looks in good health and the chances of another equity raise is unlikely.

While the equity raise will see last year’s dividends per share fall slightly due to the increased number of shares in issue, total dividend payments will continue to rise.

There’s currently a prospective 4.4% dividend yield on offer.

In return for investing billions in maintaining and upgrading its infrastructure, regulators allow National Grid to earn a reasonable profit, with the potential to earn more if it exceeds targets.

The regulatory environment can be a double-edged sword, though, as regulators have the final say over National Grid's profit potential.

If an external shock causes a steep rise in energy costs and customers struggle to pay their bills, pressure will mount on regulators to limit utilities’ profit potential.

That said, the current tariff uncertainty is unlikely to have any direct effect on National Grid. Its small US renewables division is being sold off, and the rest of its US presence is from networks, which aren’t impacted by tariffs.

The sheer scale of the investment plans bring with it increased execution risk, but should management pull it off, investors will likely be rewarded for their patience.

As always though, nothing is guaranteed, and there’s likely to be some volatility along the way as the group executes its strategy.

Primary Health Properties has long been a favourite among income-seeking investors, and it’s not hard to see why.

Now in its 29^th consecutive year of dividend growth, the group has truly earned its title as a ‘dividend aristocrat’.

PHP invests in purpose-built doctors' surgeries. The group doesn’t operate or manage these surgeries, instead, it owns the real estate in which they’re located.

Operations are focused in the UK and Ireland, meaning exposure to tariffs is minimal. And with 89% of the group’s rent roll funded by the NHS or its Irish equivalent, the tenants are lower risk.

PHP is doing a good job of maximising value from its existing properties. Elevated costs and limited new supply are giving landlords like PHP more leverage, enabling them to negotiate better rental terms.

As a real estate investment trust (REIT), PHP is required to distribute most of its profits as dividends, making it an attractive option for those looking for a steady income stream.

This translates to a forward dividend yield of 7.1%.

The high level of required distribution comes with drawbacks, though.

It can make organically funding new property purchases more difficult, so investors could be asked to fork out extra cash from time to time.

We’d also been expecting rate cuts to drive property valuations higher and stimulate more activity. There are still a few rate cuts forecast for this year, but if US-led tariffs push inflation higher, those expectations could fade.

Looking ahead, PHP is well-positioned to benefit from the growing demand for primary care facilities driven by an ageing population and the NHS backlog. Ireland is still a promising growth area, offering longer leases and potentially more favourable market dynamics.

PHP’s ability to offer relatively stable income makes it an attractive option for investors. But exposure to interest rates and question marks around growth beyond rent reviews are both near-term risks.