Best Dividend Stocks UK – Invest in Dividend Stocks

UK dividend stocks potentially give you the best of both worlds. Not only will you earn regular payments when the respective company makes a distribution, but you also stand the chance of increasing the value of your investment through capital gains. But how do you know which are the best dividend stocks for your portfolio?

In this article, we explore the UK’s best dividend stocks of 2021. We also give you some background information on how dividend stocks work, review the best brokers that offer dividend stocks, and show you what you need to do to make an investment today.

How to Buy Dividend Stocks in the UK in 3 Quick Steps

Don’t have time to read our guide all of the way through? Below you will find our three quick steps on how to buy the best dividend stocks in the UK right now!

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Best Dividend StockBrokers in the UK

If you want to buy UK dividend stocks, you will need to find an online stock brokers that meets your needs. There are many trading platforms active in the space, so you’ll need to assess factors like fees, commissions, payment methods, and the number of shares you have at your disposal. And of course – you also need to ensure that your chosen broker is regulated by a licensing body such as the FCA.

Below we discuss some of the most popular platforms that allow you to buy and trade the best UK dividend stocks.

What are Dividend Stocks?

As the name suggests, dividend stocks are simply public companies that pay dividends. That is to say, by holding at least one share in the respective company, you will be entitled to dividends as and when they are paid. This allows public companies to share some of their profits with stockholders.

In most cases, dividend stocks will release a payment every three months, although some do this bi-annually. With that said, not all companies pay dividends. This is especially the case with Big Tech stocks like Facebook, Uber, Netflix, and even Amazon.

Nevertheless, if you are holding dividend stocks in your portfolio, this allows you to supplement your investment. In other words, not only do you stand the chance of growing your wealth through capital gains (when the value of the shares go up), but also via quarterly/bi-annual dividends.

Nevertheless, below is a quick and easy example of how dividend stocks work in practice.

• You are holding 1,000 shares in Tesco
• The company announces that it plans to pay a dividend yield of 9p per share
• As you hold 1,000 shares, this means that you will receive £90 in dividend payments
• When the dividends are distributed, the £90 will be paid into your brokerage account

In terms of how much you should expect to receive, there really is no hard and fast answer to this question. This is because there are lots of variables to take into account. In theory, the better the company performs, the more you should expect to receive. However, this isn’t always the case – as the company might need to reinvest its profits into other ventures. In other cases, it might opt to initiate a buy-back scheme.

Investing vs Trading Dividend Stocks

As we briefly alluded to earlier, there is a distinct difference between ‘investing in stocks’ and ‘trading stocks’.

• If you invest in stocks, you own the underlying instrument. This means that (among other shareholder perks) you will be entitled to dividends
• If you trade stocks, you will be trading CFD instruments. This means that you will not own the underlying stocks and thus – have no right to any shareholder perks

The good news is that some CFD brokers have a dividend ‘adjustment’ policy in place. In simple terms, this means that those holding long positions on stock CFDs will be entitled to a dividend payment. This payment is deducted from traders that are short on the respective stock, meaning that your dividend payments are covered by other traders of your chosen CFD broker site!

Opting for the dividend stock CFD route comes with other benefits, such as:

• You can apply leverage to your positions – meaning that you can trade with more money than you have in your account. In the UK, this is typically capped at a ratio of 1:5.
• You can go both long (buy order) and short (sell order) on your chosen dividend stock CFD
• You will often benefit from tight spreads and zero-commission trades

With that being said, trading dividend stock CFDs won’t be for everyone. In fact, the process is arguably more suited for those of you with a bit of trading experience under your belt.

The Best Dividend Stocks in the UK

So now that you have a bit of background on how dividend stocks work, we are now going to discuss some of the best dividend stocks in the UK as of 2021. Of course, you are required to perform your own research. You are also advised to look beyond the dividend payment, as capital gains are equally (if not more) important.

After all, it is all good and well receiving a dividend yield of 10%, but if the company loses more than this in share value, you will not make money!

1. British American Tobacco – Recent Dividend Yield of 7.2%

British American Tobacco is one of the largest manufacturers of cigarettes globally. The firm, which is listed on the London Stock Exchange, recently paid an attractive dividend yield of 7.2%. British American Tobacco has a long-standing track record in paying dividends, with the size of its distribution increasing each year for two decades. This makes it one of the very best dividend paying stocks in the UK.

2. Tesco – 58% Increase on Most Recent Dividend

Tesco is the UK’s largest supermarket chain, with ventures into other sectors – both domestically and overseas. This includes everything from clothing, insurance, credit cards, and consumer banking. In terms of its dividend policy, the company’s most recent payment saw an increase of 58%. This takes the annualized yield of Tesco shares to just over 4%.

3. BT – Recent Dividend Yield of 9.5%

British Telecom (BT) is a UK leader in the telecommunications and TV media sectors, with a global presence that now spans 180 countries. This particular FTSE-100 stock rewarded shareholders with a juicy dividend yield of 9.5% in its most recent distribution. This makes BT shares one of the most generous dividend payers in the UK space. But, it does remain to be seen just how sustainable such a large yield is for the firm.

4. Persimmon – Recent Dividend Yield of 8.68%

Persimmon is a large UK-based homebuilder that was first formed in 1972. Its most recent dividend payment worked out to an annualized yield of 8.68%, which is huge and makes it on of the best UK dividend stocks for 2021. Take note, profits at Persimmon were down in its most recent earnings report, so this could have a negative impact on its future dividend payments.

5. Aviva – Recent Dividend Yield of 9%

An additional high-yielding dividend stock that is worth considering is that of Aviva. The firm operates primarily in the UK and European insurance scene, and it also has a growing pension division. Although its stock price has been somewhat stagnant in recent years, Aviva does at the very least pay a juicy dividend. In its most recent distribution, this stood at a whopping yield of 9%.

How to Pick High Dividend Stocks

When it comes to picking high dividend stocks on a DIY basis, this can be a challenging task. After all, just because a UK company pays a high dividend in one quarter, this isn’t to say that it will continue to do so.

With this in mind, below you will find a few tips on how to pick high dividend stocks with ease.

Look at Historical Dividend Payments

Your first port of call should be to look at the company’s historical dividend policy. A prime example of this would be British America Tobacco. On the one hand, you might be somewhat sceptical about the sustainability of a 7.2% dividend yield.

But, in the case of BAT, the tobacco giant has increased its dividend payments every year for the past two decades. As a result, these are the sort of companies that you want to be targeting if you want to build a portfolio of the best dividend stocks.

Research at the Financials

On top of exploring the historical dividend policy of a company, you also need to look at the financials. In particular, spend some time looking at the relationship between the dividend yield and that of its share performance. For example, let’s suppose that you invest in a UK stock that pays an annualized dividend of 5%.

Although this is a healthy form of passive income, it defeats the object if the firm lost 10% in share value. On the flip side, you need to remember that stock investments should be viewed in the long run. In fact, the general rule of thumb is that you should avoid selling your shares for at least five years.

In doing so, you can ride out the volatile waves of market turbulence. Nevertheless, you should also look at the specific industry the dividend stock operates in. For example, if hold shares in an airline company, but the wider travel industry is suffering because of the COV-19 pandemic, the firm might be forced to suspend its dividend policy.

Consider a Dividend Stock ETF

When it’s all said and done, sometimes it is just easier to turn to an ETF. For those unaware, an exchange-traded fund (ETF) allows you to invest in a basket of dividend shares through a single trade. In other words, the ETF provider will actively buy and sell dividend stocks on your behalf.

This means that once you make an investment, the rest of the process is passive. This also means that you will not be required to spend heaps of time research dividend stocks on a DIY basis. Crucially, ETFs typically distribute your share of dividend payments every three months.

Conclusion

Dividend stocks allow you to grow your money in two forms – traditional capital gains and frequent dividends. While not all UK companies distribute dividends, many do. As such, seasoned investors will often allocate a proportion of their portfolio into dividend stocks.

But, it is important to remember that an investment should not be made just because the respective firm pays dividends. To find the best dividend stocks for your portfolio, you need to look at a range of other factors, such as whether the dividend payment is sustainable in the long run, and what the future growth of the company looks like in comparison to its sector counterparts.

References

To ensure we bring you the most reliable and accurate information possible, our writers use primary sources to support their content. These include studies, government resources and commentary from industry experts.

The European Securities and Markets Authority (ESMA). “Renewal of restrictions on CFDs, https://www.esma.europa.eu/press-news/esma-news/esma-renew-restrictions-cfds-further-three-months-1-may-2019“, Accessed July 1 2020.

Financial Conduct Authority (FCA). “Continuing obligations, https://www.handbook.fca.org.uk/handbook/LR/9/7A.pdf“, Accessed July 1 2020.

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