The prospects for UK dividend shares have become significantly more uncertain since the stock market crash. Weaker economic growth prospects could mean a larger number of FTSE 100 and FTSE 250 companies struggle to make their dividend payments. This could lead to them cutting shareholder payouts over the coming months.
However, by focusing on companies with solid financial performances and wide economic moats, it’s possible to generate a potent mix of income and capital returns from UK dividend shares. As such, now may be the right time to invest £5k, or any other amount, in UK income stocks.
Dividend prospects after the stock market crash
The recent market crash provides further evidence that the stock market is very unpredictable on a short-term basis. Therefore, when it comes to obtaining an income stream from FTSE 100 and FTSE 250 shares, focusing on high-quality businesses could be a sound move. They may be less likely to cut dividends in the short run, and more likely to grow them in the long run.
As such, buying companies with wide economic moats could be a profitable move. They may be in a relatively strong position to deliver impressive financial performance due, for example, to a unique product or a lower cost base than their rivals.
Although identifying such businesses isn’t an exact science, investors can assess the competitive advantage of a specific company versus its rivals by focusing on its financial performance in a variety of economic circumstances. This may be especially helpful at the present time due to the economy’s challenging outlook after the market crash.
A wide margin of safety
Even if you purchase the best UK shares on offer after the market crash, they could fail to perform as expected in the short run. Indeed, the stock market’s decline earlier this year highlighted that it can be extremely volatile over a period of months.
Therefore, it’s important to demand a wide margin of safety before buying any dividend stock. This may take the form of a relatively high yield or a low price-to-earnings multiple, for example. It could mean that if the company’s financial performance disappoints, its share price is less affected than it would be if it was trading on a relatively high valuation.
Fortunately, there are a wide range of UK shares trading on low valuations after the recent market crash. Some stocks have rebounded in recent months as investor sentiment towards some sectors has improved. But many others still offer a mix of high yields and low earnings multiples that suggest they’re undervalued.
Through buying and holding a diverse range of them, in the long run, you could well obtain a relatively high income return that’s significantly greater than other mainstream assets.