For decades, investors have outperformed the market by targeting high-dividend stocks. Warren Buffett’s dividend-fuelled wealth made him a household name and grew his investment company to $81.4bn in size.
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The best bit is that finding and taking positions in dividend stocks is a long way from being rocket science. Not only does it work, but it’s also easy to do. This review will show you how to buy the best UK dividend stocks.
Table of contents
- What Are Dividend Stocks?
- The Best Dividend Stocks to Buy in the UK Right Now
- Imperial Brands PLC (LSE: IMB)
- Aviva PLC (LSE: AV)
- Vodafone Group PLC (LSE: VOD)
- Rio Tinto PLC (LSE: RIO)
- Why Invest in High Dividend Stocks Now?
- WHAT TO KNOW BEFORE INVESTING IN UK DIVIDEND STOCKS
- HOW TO FIND AND EVALUATE UK DIVIDEND STOCKS
- HOW TO BUY DIVIDEND STOCKS ONLINE
- Final Thoughts
What Are Dividend Stocks?
A dividend is a reward paid to the shareholders of a company in return for their investment – the purchase of shares. Equity owners own a percentage of a company so receive a percentage of the profits. The timing and amount of the dividend are determined by the company’s management. They will consider the firm’s profits, prospects and future budget requirements.
High-dividend stocks are those that pay dividends that are higher than the market average or a benchmark. One benchmark that is commonly used is the return generated on a long-term government bond, and the annual yield on UK 10-year gilts is currently 3.183%.
The Best Dividend Stocks to Buy in the UK Right Now
The FTSE 100 is packed full of firms that are known for paying high dividends. These include banks, oil companies and mainstream manufacturing firms. They are largely regarded as safe bets for generating steady profits and returning cash to investors in the form of dividends. For the FTSE 100 dividend yield, the average for all 100 members is 3.69%.
The UK’s benchmark index doesn’t have the same sparkle or growth potential as the tech-heavy Nasdaq index. High-dividend stocks in the UK aren’t going to change the world like Tesla or Zoom, but they can still make you rich. Below are our picks of the best dividend-paying stocks in the UK, and each one has a solid claim to be included in an income-orientated portfolio:
M&G PLC (LSE: MNG)
London-based investment management company M&G uses its cash pile to invest in equities, property and bonds. For more than 80 years, it has been making shrewd decisions in relatively safe assets and giving cash returns to its shareholders.
The company only listed on the London Stock Exchange (LSE) in 2019 when it was spun out of insurance group Prudential. However, it has already been marked as one of the highest-dividend-paying stocks in the UK.
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In 2019, the annual return was 10.81%. Although the stock slipped below double-digit returns in 2020 and 2021 when it generated a yield of 9.20%, the current yield on the stock is 10.09%, making it an obvious choice for anyone wanting to invest in UK dividend stocks.
Imperial Brands PLC (LSE: IMB)
Imperial Brands, formerly known as Imperial Tobacco, is a UK-based FTSE 100 tobacco and cigarette manufacturer. It has a long track record of returning cash to investors and is considered one of the best dividend stocks in the FTSE 100.
Expanding market share in tobacco products is politically sensitive nowadays. Without the need to invest in new projects, the firm focuses on operational efficiency, and this means that significant profits are returned to shareholders.
The enduring appeal of the super-reliable IMB dividend means that many buy-and-hold investors step in to buy the stock whenever it appears undervalued. This can result in capital gains as well as income returns. The price rise in Imperial Brands stock from the low point of November 2020 to December 2022 was an impressive 68.3%.
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The IMB dividend yield is currently 6.68%. This reflects some recent share price strength, but still beats the market average by a wide margin. Many might be tempted to demonstrate patience and wait for the stock price to fall so that they can lock in the +10% dividend yield that the stock was recording for periods of 2019, 2020 and 2021.
Aviva PLC (LSE: AV)
Insurance giant Aviva has more than 33 million customers worldwide and, for some time, has been one of the top UK dividend stocks.
It’s not just outsiders who are buying Aviva stock. Official reports of 30th September 2022 disclose that the senior management have been buying stock in the firm, which can be taken as a positive sign. CEO Amanda Blanc and two other top-ranking staff purchased shares totalling around £600,000 in value.
Blanc has been in the top job since July 2020 and has already carried out significant reforms. The company has cut costs and focused its attention on the UK, Ireland and Canada markets, and it looks as though the benefits of that shake-up are about to begin feeding through to the bottom line.
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The reforms that Blanc put through caused a temporary dip in the dividend yield in 2020. The dividend yield, which had been as high as 18% in 2018, dropped to as low as 6.4% in March 2020. With restructuring costs having fed through the system, the current yield on AV stock is 10.96%, making it one of the best UK dividend stocks to buy now.
Vodafone Group PLC (LSE: VOD)
Vodafone is the fourth-largest mobile operator in the world and has almost half a billion customers. It’s one of the largest companies in the FTSE 100. While always on the lookout for expanding market share, it has no issues with returning spare cash to shareholders, rather than leaving it sitting on the balance sheet.
It’s some years since Vodafone was considered an exciting way to tap into a growth sector. Technological advances in other areas mean that its current business model is closer to that of a utility company. This didn’t mean that VOD stock missed out on the 2022 sell-off in tech stocks, and it was at one point trading more than 20% down on the year.
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Weakness in the Vodafone share price can be expected to trigger buy orders from high-yield investors. The firm currently has a predicted yield of 10.58%. In 2021, the yield ranged from 14.68% to 19.89%, depending on what price level shares were bought at.
Rio Tinto PLC (LSE: RIO)
Rio Tinto is one of the world’s largest mining companies. Its reputation as a high-yield stock might not be quite as strong as some of the other stocks on this list, but it is included because it also offers a bit more upside in terms of capital growth.
The price of mining stocks can move dramatically as the outlook for the global economy shifts. An economic boom would be great news for the Rio Tinto share price, and there are many who believe that we’re just about to enter a commodities supercycle.
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RIO’s dividend yield has for three years traded in a range between 5% and 10%, but it currently stands at 9.44%. This makes now an ideal time to pick up a stock that offers income returns and also the possible kicker of capital gains.
Why Invest in High Dividend Stocks Now?
While all investment is inherently risky, taking positions in high-dividend stocks can scale back the risk-return ratio. The dividend stocks highlighted are all large-cap firms in the FTSE 100. They have critical mass to see them through economic downturns and consistent revenue streams.
Global pandemics and economic recessions can cause some businesses to struggle. However, while consumer discretionary stocks might suffer, Vodafone’s phone contracts and Aviva’s home insurance policies are likely to be one of the last costs to be cut from a household budget.
Flipping things around and considering the market-wide sell-off of 2022, it’s possible to claim pullbacks in the stock market, which can be good news for high-yield stock investors. This allows them to get in at rock-bottom prices and hopefully secure a higher dividend yield.
WHAT TO KNOW BEFORE INVESTING IN UK DIVIDEND STOCKS
It’s possible to make substantial profits from high-dividend stocks, but there are some potential downsides.
You are forsaking the chance of catching the next Amazon or Google (Alphabet) stock. These two firms have never paid a dividend and instead invest their spare cash back into the business. This approach marks them out as growth stocks and can result in the share price soaring far higher than it ever will with a FTSE 100 dividend stock.
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While high-yield stocks are largely insulated from economic downturns, they aren’t immune. The unprecedented events of 2020 rocked oil companies as entire countries ground to a halt and demand for oil plummeted.
Royal Dutch Shell took the drastic step of cutting its dividend for the first time in its history, and because it was regarded as a dividend stock, the market reaction was doubly dramatic. If a dividend stock loses its reputation for paying out to shareholders, there can be a rush to the door.
YOU STILL NEED TO OPTIMISE YOUR TRADE ENTRY POINT
Dividend yield depends on what price you buy at. The dividend paid to shareholders is paid according to the number of shares you hold. If you buy into a stock at a price twice that of your neighbour, then their dividend yield will be twice what yours is.
Dividends are paid on certain dates, and getting to grips with some of the terminology can be useful. This report can help you do that. The good news is that dividends tend to be ‘priced into’ the share price, so if you sell before dividend ex-date, you shouldn’t lose out disproportionally. However, it is something to be aware of.
WHAT WARREN BUFFETT THINKS ABOUT DIVIDENDS
Firms that pay out dividends have, to some extent, run out of ideas. They’re not reinvesting cash in new projects, so while your return will be stable, it won’t be spectacular.
Warren Buffett himself invests in dividend-paying companies, but his investment vehicle, Berkshire Hathaway, ironically has never paid a dividend to BRK shareholders. Buffett backs himself to make a better return by holding onto the cash rather than returning it to his investors.
HOW TO FIND AND EVALUATE UK DIVIDEND STOCKS
If you’re looking for dividend stocks, the first step involves understanding the process used to calculate yield:
- The formula is annual dividends per share ÷ price per share.
- You simply divide how much was paid in dividends in cash terms in a given year per share by how much one share cost to buy.
The estimates applied to each of the six stocks in the text above were calculated using the most recent dividend per share divided by the share price for each company on 27th July 2020. If prices had been taken on another date, then the yield calculation would have been different.
With dividend investing being so popular, a lot of brokers and research houses offer tables that use real-time prices. AskTraders has also produced research notes such as these, which go into the subject in greater detail.
Choosing to use a well-known and regulated broker not only means that you’re protecting yourself from scams, but it also allows you to tap into their extensive research tools. These are aspects that weaker brokers typically don’t offer.
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HOW TO BUY DIVIDEND STOCKS ONLINE
It takes minutes to set up an account with an online broker and start buying high-dividend stocks. It can be time well spent, allowing you to then sit back and enjoy long-term gains.
Modern brokers allow you to follow your positions on desktop platforms or on mobile trading apps. There are also free demo accounts on offer, so you can practice the mechanics of trading, experiment with virtual cash, and learn how to access research and analysis tools.
There are two factors that are particularly important for dividend investors:
- How long you want to hold your position will determine whether you buy the stock outright or in CFD form. This research note on CFD vs share dealing explores that subject, but if your investment timeline is months and years rather than days or weeks, then you are probably better off buying shares outright.
- Choose a well-regulated broker to ensure that your funds are safe. One operating under licence from any of the below regulators is a good place to start.
- Financial Conduct Authority (FCA)
- Australian Securities and Investments Commission (ASIC)
- US Securities and Exchange Commission (SEC)
- Cyprus Securities and Exchange Commission (CySEC)
1. RESEARCH DIVIDEND-PAYING UK COMPANIES
Successful dividend trading relies on establishing the long-term prospects of a company. Good brokers offer in-depth fundamental analysis and news feeds on the different stocks. Tapping into their free research is a good first step.
2. FIND A BROKER
Most brokers offer markets in the FTSE 100 stocks. Your decision on which one to use will, to some extent, come down to personal preference. The functionality of the different sites can ‘feel’ different, and it’s worth checking the T&Cs to find the one with the lowest administrative costs for your strategy.
3. OPEN AND FUND AN ACCOUNT
Registering for and funding accounts is very straightforward. The process of verifying your account and logging your Know Your Client (KYC) documentation should take only a matter of minutes. After that, you’re ready to fund your account and start trading.
4. SET ORDER TYPES
The platforms will offer you a range of order types to help you manage risk. Stop losses are trading instructions that are built into your account to kick you out of a position at a certain price. This is very useful in the event that a position goes wrong, but is usually associated with more speculative strategies.
If you’re looking to buy and hold, then you might want to consider not using stop losses. There is a risk that a momentary ‘flash crash’ in price stops you out of your position at a loss, but price then suddenly rebounds.
5. SELECT AND BUY DIVIDEND STOCKS
Buying the best dividend stocks is, then, as simple as logging on, entering the amount of shares you want to purchase, and clicking ‘Buy’. It’s important at this stage to double-check if you’re buying in CFD format or buying shares outright.
If you are ready to start investing in shares and building your portfolio, you’ll need a broker that is regulated, has low fees, and has a user-friendly platform. Finding one can be a daunting task, which is why we’ve selected some of our favourites that tick all of these boxes to help you get started.
These trading platforms have invested heavily in developing functionality, which is ideal for those just starting out trading. They offer the additional safety of being regulated, but have also been operating in the market for a long time.
Part of the secret of their success is the support they provide their clients in terms of educational resources, research materials and high-quality customer service. Even if you’re just curious, it’s possible to visit their sites and try out some dividend stock positions in a risk-free demo account to see how they work out.
If you’re looking to balance risk and return, then high-dividend stocks ought to be your focus. More speculative strategies have their place, but beginners, in particular, might benefit trading those using demo accounts or if using real funds, in very small size.
Dividend stocks might not be the most exciting market to trade, but the record books show that in terms of steady returns, they are hard to beat.
You don’t always need to have an exciting new idea to make a return or a tip-off from someone in the know. Sometimes, just following established practice can pay off equally as well.