The appeal of buying UK dividend shares may have waned for some investors after the 2020 stock market crash. The bear market served as a reminder of the volatility and uncertainty inherent in owning shares in any company.
However, the potential returns on offer from dividend stocks could mean they continue to be attractive on a long-term basis. Their relatively high income prospects, the potential for capital gains, and their tax efficiency when bought in a Stocks and Shares ISA could make them appealing at the present time.
The passive income appeal of UK dividend shares
In a low interest rate environment, the yields on offer from UK dividend shares could be very attractive on a relative basis. For example, it’s entirely possible to obtain a portfolio that contains a diverse range of FTSE 350 companies with an average yield in excess of 4%. This could be significantly higher than other options available to investors.
Certainly, there’s never any guarantee that dividends will be paid by any company. Nor is dividend growth ever to be assumed. But, judging by the past performance of the stock market, a return to stronger operating conditions is likely to be ahead for many companies. And that could improve their passive income prospects.
Tax efficiency when purchased in a Stocks and Shares ISA
A Stocks and Shares ISA could be a highly effective means through which to buy UK dividend shares. ISAs are tax exempt. This means there’s no dividend tax or capital gains tax applied on amounts invested within them. This could be especially useful for income-seeking investors. Certainly since the annual dividend tax allowance of £2,000 may mean that many portfolios generate an amount of income that would normally lead to tax being paid.
Stocks and Shares ISAs also offer penalty-free withdrawals. They’re cheap to administer on the whole, and can be set up online in a matter of minutes. Although their valuations can fluctuate wildly, as shown in the 2020 stock market crash, they have the potential to offer high net returns on a relative basis over the long run.
Minimising risks when purchasing income shares
As mentioned, it isn’t possible to reduce the risks of investing in UK dividend shares to zero. There’s always the possibility of losing money. And of failing to receive any dividends.
However, these risks may be reduced. This can be achieved by purchasing companies with solid financial positions and dividends that are amply covered by net profit. Furthermore, an investor could buy a diverse range of companies. This may help to reduce an investor’s reliance on a small number of businesses for their income.
This may produce a more resilient income return that leads to a more robust Stocks and Shares ISA performance in a wide variety of stock market conditions.