Investing can be a great way to earn some passive income, but you need to be sure that you are investing in the right stocks. This guide will tell you how to invest in dividend stocks in the UK.Â
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How To Buy Dividend Stocks
To buy dividend stocks you can choose to use an online share dealing platform. There are a lot of these in the UK, some of the more well known are eToro, IG and Fineco.Â
You will need to do some research to find the best one to suit your needs as they can vary widely. Some will have a minimum deposit amount and others will have a platform fee.Â
When you open a brokerage account with a share dealing platform you will need to provide personal information such as name, ID, bank details and National Insurance number.
You will then need to put some funds in your account to begin trading.Â
Now you can start to research the stocks that you are interested in and use your share dealing platform for some market research including past performance.Â
To purchase shares you will need to find their stock code. Once you have that you can go ahead and purchase your shares.Â
Investing For Income
Investing for income is fairly self explanatory. You will be buying dividend stocks with the intention of gaining a regular income from the dividends.Â
This is a type of passive income generation that can supplement other forms of earnings.Â
When you receive your dividends you don’t need to convert it to cash you can reinvest it back into the company to gain more shares. This works if you are looking for a long term investment strategy.Â
Other ways to make money from dividend stocks is value investing or growth investing. The former involves buying shares that are undervalued with a view to selling them on when they realise their true market value.Â
Growth investing means buying stocks in companies that are growing fast and are outdoing their peers or receiving a lot of public or media attention.Â
Best Dividend Stocks
If you are wondering what some of the best dividend stocks are you can look to the FTSE 100.Â
If you’re thinking what is the FTSE then click here.
Some of the more well established companies are a good option for dividend stocks as even if performance is not as hoped they will still pay dividends to retain their reputation.Â
Currently there are property companies such as Persimmon, pharmaceutical giants such as GlaxoSmithKline and mining companies like Rio Tinto which pay dividends.
The divided stocks you choose will depend on your circumstances and investing strategy.Â
You should beware of stocks offering high dividends as it may be that their share price is low and this can be a warning sign that future payouts could be in danger.Â
What Are Dividend Stocks?
Dividend stocks are shares in companies that give their shareholders dividends on a regular basis.
While many companies don’t distribute dividends or do so sporadically, dividend stocks are known for giving predictable and regular dividends to shareholders.
Many have a progressive policy which means that the dividends will grow with each payout. These are typically well established companies who have a record of distributing earnings to their shareholders.Â
Most companies will pay dividends when they have made a profit. This share of earnings may be paid quarterly or more often. The dividend paid out will be a payment per share owned by the stockholder.Â
While some companies will only pay out when they have made good profits others will pay dividends even if they haven’t experienced a profitable period.
These are paid from past earnings or reserves and helps to retain a reputation as a dividend stock.Â
Evaluating Dividend Stocks
Choosing a company that will pay dividend stocks can be difficult, but there are ways to evaluate which will pay out regularly. The first metric that can be used is the dividend yield.Â
The dividend yield is the company’s annual dividends per share that are paid divided by the current price of the share.
The resulting figure will show how much the company pays out each year in dividends relative to the price of its shares. This is expressed as a percentage. A dividend yield of above 2% may be considered respectable but 5-6% is better.
It will of course depend on what is normal for that particular industry and also on the context of the commodity or sector in question
It is also possible to calculate a company’s dividend cover ratio. This applies to companies that do not pay dividends from profit but often from retained earnings.
This ratio demonstrates how many times the company can pay out dividends from previous earnings. A dividend cover ratio of above 1.5 is considered good and indicates sustainability.Â
It means they can pay out one and half times the dividends they have from the earnings they have made. This is an important metric for long term investment.Â
Why Buy Dividend Stocks?
As an owner of dividend shares you are investing in the company and in effect become a part owner of that company.Â
So when it is profitable you will receive your share of those earnings as dividends.Â
Dividend stocks are a way of getting regular income from your investment. Payments are usually made quarterly, but some companies may pay out once or twice a year.
The amount that you receive as a dividend can vary according to the company’s performance.Â
The dividend stocks can also make money for you when they go up in value. This is called capital appreciation and means that you can sell the shares on and make a profit.Â
In Conclusion
You can invest and trade in dividend stocks as a means of gaining income but remember that companies are not obliged to pay out dividends. Always seek the help of a financial adviser if you are unsure about investing.Â
We hope that this guide learning how to invest in dividend stocks UK has been helpful.
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Disclaimer: Content on this page is for informational purposes and does not constitute financial advice. Always do your own research before making a financially related decision.
