Dividend shares: 1 to buy and 1 to sell

A company that distributes income to its shareholders can be a good source of passive income. But dividend stocks can be tricky.

Interest rates in the UK only reach 4%. That means investors can make better money than ever by buying cash or bonds.

As a result, dividend investors must choose what they invest in. With that in mind, here are the UK dividend stocks I’m likely to sell and I’m thinking of buying.

Exit: Experian

I have it Experience (LSE: EXPN) stock in the portfolio and I think it is one of the best stocks in it FTSE 100. But I am looking seriously at selling them this month.

These firms have limited competition, low capital requirements, and operate in industries with high barriers to entry. All this speaks of the quality of the business.

So what do I sell? Simply put, I think there are better opportunities for me elsewhere right now.

Experian Corporation’s dividend yield is 1.3%. This is not a problem for me personally, but with interest rates at 4%, it needs to grow to be a viable investment.

The problem I have is that I don’t see where the necessary growth is going to come from. Neither Experian’s revenue nor operating margin has grown as fast as it has in the last decade. Experian’s revenue has only grown about 4% annually over the last decade. And the slow demand for mortgages looks like a headwind to me.

The company’s competitive position seems to have facilitated margin expansion. But Experian’s operating margin is lower than it was a decade ago.

Share repurchases can also increase dividends over time. But with buybacks reducing the number of shares by less than 1% per year, I think it’s hard to see this as a meaningful growth catalyst.

In: Diploma

diploma (LSE:DPLM) shares currently yield a 1.8% dividend. That’s higher than Experian and I think the company’s growth prospects are more promising.

The business has slightly higher capital requirements than Experian. But I think the returns on these assets are still impressive.

The real reason I prefer Diploma over Experian as an investment opportunity is the company’s growth. The company’s revenue is growing at about 13% annually.

Compared to Experian’s 4%, that’s a significant advantage. And this difference is reflected in the dividends received by the shareholders. Diploma’s dividend per share has increased 200% over the past ten years. Experian has increased by 68%.

Compared to Experian, Diploma does not have the same competitive position. I think that is the biggest risk with this stock.

Unlike Diploma without protection from competition. A dominant position in a niche market creates barriers to entry for both larger and smaller competitors.

Invest in UK shares

I’m not sure that Experian offers the kind of return I’m looking for with an interest rate of 4%. I think it’s a great company, but I don’t see a return in today’s prices.

Diploma, on the other hand, seems to offer better growth as well as better returns today. That is why I want to sell shares in Experian to increase my investment in Diploma.