How to Invest in Dividend Stocks UK

Check out this simple guide to get you started.

Updated: May 18, 2024
Matt Crabtree

Written By

Matt Crabtree

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If you’re looking for a great way to invest and earn some income, or perhaps earn income that you can re-invest and compound in your portfolio, dividend stocks is a top choice to do so. One of the top reasons people invest in dividend stocks is for the income that they can provide for you. 

Curious about how to invest in dividend stocks? Check out this simple guide to get you started.

What are Dividend Stocks? 

A dividend stock is defined as a stock that pushes profits back to the shareholders. When a stock is defined as a dividend stock, it’s because those companies consistently share with the investors, paying out high dividends, and doing so regularly.

It’s also expected that they will do so for the long-term. 

With most dividend stocks, you don’t see as much volatility in the market, although there will be some movement. There is still risk as well, but your chances of getting dividends and interest paid back to you are much more reliable. 

This is a common choice for people who specifically want revolving income from their stocks. However, it can also be beneficial if you want to be able to re-invest that income and compound on your investment. 

How Does it Work? 

It’s a pretty simple concept. You purchase shares of the stock that pays dividends, and you receive income based on how many shares you hold. Most of these stocks will pay quarterly dividends, but there are some that pay monthly, semi-annually, or even annually instead. 

When a dividend is paid, it’s remitted to you in a dollar amount and simply deposited into your investment account. Then, it’s up to you whether you take that as cash, reinvest it, or just let it be. 

Apart from purchasing stocks that pay dividends, you don’t have to do anything really. Just be sure to make informed choices. Of course, if you want to reinvest, be sure to do that a few times a year as well. 

When a company pays dividends, it is because they are profitable and choose to share that profit with the shareholders. 

Dividends are not always guaranteed, and will depend on the profits, as well as board decisions. The board of directors determines whether there will be a dividend, makes an announcement, and then dividends are sent on the payment date. 

Take a closer look at the breakdown of dates in the dividend process. 

Dividend Payment Process Dates

There are four specific terms that you might want to be familiar with. These are the dates that will determine whether there is a dividend, when it is paid, and whether or not you will qualify. 

  • Declaration date
  • Record date
  • Ex-dividend date
  • Payment date

These dates are partially self-explanatory, but let’s go over what they mean. The announcement, or declaration date, date is the date that they officially announce a dividend. The board of directors makes a determination, and delivers the details to the exchange commission of the upcoming dividend plans. 

The record date is the date that shareholders are recorded.

If you are a shareholder on this date, you will receive the dividend payment when it comes out. Next, we have the ex-dividend date, which is slightly different. If you are newly purchasing the stock, any shareholder purchases after this date won’t qualify for a dividend. 

The payment date is the date that all shareholders who qualify are paid the dividend accordingly. 

Investing in Dividend Stocks

We’ve covered the basis of how a dividend stock works, but how can you invest in them? The first step is to have some sort of online broker account. There are many great options out there, so choose what feels right for your needs and budget. 

Once you have an account setup, determining what to invest in is the magic potion that can earn you dividends. 

These are the most common types dividend stocks to invest in. 

1. High Yielding Funds

One of the most common places to find dividend paying investments are in mutual funds and ETFs with high yields. On either of these asset types, you will want to look for high yields in order to be earning dividends. 

What these funds do is invest in individual companies and funds that pay high yields. They pull together a compilation of stocks or funds known for their dividend payouts. Instead of you having to sort through the stocks and make a choice, a backend manager does that for you. 

And then the mutual fund or ETF passes through the dividends to the shareholders of these funds. The dividends that you receive will be a compilation of what is paid to the fund, and then disbursed to shareholders like you. 

The nice thing about most of these high yielding mutual funds and ETF is that the cost to hold them and let someone else manage them is relatively low to you. Some of them have annual expenses that are less than .05 percent. 

2. Individual Stock Holdings

There are plenty of stock holdings out there that pay out regular dividends. You can see the dividend history of any company or stock with a little bit of basic research. Remember that most companies pay quarterly, but there are some that pay more or less often as well. 

Here’s a great example for you. Walmart is a US-based company that is publicly traded on an exchange. They pay dividends regularly, and are notorious for raising their dividend payouts consistently too. In fact, in 2022, they raised their dividend payouts for the 49th year in a row. 

There are plenty of other stocks like this out there.

You just need to take some time to look for them to find the right fits. In the UK, you may be looking for a UK company, but you can also likely invest in some of these stocks too on the right platform. 

3. Dividend Appreciation Holdings

And finally, you can invest in mutual funds and ETFs that are known as dividend appreciation assets. These are similar to the concept that we just shared where companies consistently raise their dividend payouts. 

But this particular scenario is related to mutual funds and ETFs rather than individual stocks. The appreciation comes from the increase in dividends, which any shareholder like you will surely appreciate when they receive the income. 

If you’re looking for yield, you’re not going to find it here. Instead, you have funds that consistently pay out high dividends, making a reliable income source for you. Instead of growth in price, there is growth in income to the shareholders. 

If you want growth or compounding in your portfolio, you can take those dividends paid and then reinvest them. Or you can set them aside for savings to be used when you need the cash. 

Top UK Dividend Stocks

You can do your own research and determine what stocks or funds appeal to you most. Remember that you don’t have to purchase a stock.

You could also invest in an ETF or mutual fund if you prefer. 

These are some of the highest yielding stocks in the UK. 

  • Imperial Brands (IMB)
  • GSK (GSK)
  • British American Tobacco (BATS)
  • BT.A (BT)
  • Schroders (SDR)
  • Lloyds Banking (LLOY)
  • WPP (WPP)
  • HSBC (HSBA)
  • Admiral (ADM)
  • Johnson Matthey (JMAT)

These companies are reported as having an annual yield of anywhere from 4.2% to 7.35% this year. This could be a good place to start if you’re looking for dividend investments. 

Choosing Dividend Stocks

There are plenty of dividend stocks out there to choose from. While we shared this list of 10 options, that is just the tip of the iceberg. It also has absolutely no ETFs and mutual funds, which can also be advantageous to you. 

So how do you choose? 

Well, doing some research is really the best way to be informed. But these are some details that you may want to look at as you’re checking things out. 

Dividend Yield

Look at the annual yield, or the dividend yield, of any company you are considering investing in. This number tells you a lot about what to expect for dividends. The number is the yield of dividends paid out in a 12-month timeframe. 

When that dividend yield is a high number, it’s a great indicator for good dividends. But, don’t be fooled by the number. You should also look at how financially sound the company is as a whole, so you can determine whether or not that yield (or the company) is sustainable through the years. 

In some cases, those high yields have occurred because a company is in trouble, so check back at the history and choose stocks with consistent payouts and clear financial stability. 

Payout Ratios

Another number you might want to look at is the payout ratio. This gives you a percentage of how much net income the company is paying in dividends. So, for example, if you see a payout ratio of 50%, this means that they take 50% of their net income and return it to stakeholders through dividends. 

While that is great and all, the company may not always be able to pay out at that high of a ratio. Just be aware that their dividends may go down in some years. Lower ratios are often more reliable for consistent payout amounts. 

Total Return

How is the stock performing as a whole? While you may be solely focused on the dividends, calculating this number can help you better understand what you total return will be from the stock. This is indicative of rising stock prices, as well as your dividends. 

It’s a simple calculation in most cases. 

Take the rise or fall of the stock price, and add it to the annual dividend yield. That number is your total return. Here is a quick example. 

Your stock experiences a 5% increase in price in a single year. That same year, they pay out a 5% dividend. When you add the two numbers together, you get a 10% total return from that stock. 5% is in your pocket, and 5% is in the increase of the stock. 

Conclusion

Learning how to invest in dividend stocks is pretty simple overall. You just need to know what to look for. These stocks are great if you’re looking to build an income-producing portfolio.

Be familiar with the details, and always take a good look at the stock or fund to best understand whether they are consistently reliable for paying out dividends, and even raising their dividends from year to year.

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