UK dividend stocks have become more popular with investors I’ve spoken to in the past year. Perhaps they’ve seen income as more of a priority since the pandemic. Speaking for myself, I have more of a desire to receive income from stocks than outright capital appreciation. Even with £100 a month, I should be able to build an investment pot paying income via these dividend stocks.
Putting £100 into dividend stocks
There’s a wide variety of UK dividend stocks I can choose in which to invest my £100 a month. I’d look to put the full amount each month into one stock, and vary the stock I picked each month. If I split my £100 up into different stocks each month, the transaction costs would be too high.
Putting my funds in one dividend stock a month isn’t a bad thing anyway. This is because the dividend yield changes along with the stock price every day. The way I calculate the yield is by looking at the dividend per share in comparison to the share price. The larger the proportion this is, the higher the yield will be.
For example, there were a couple of days last week when the FTSE 100 index sold off hard. If last week was a week when I was looking to invest my £100, I could have picked a stock that saw a share price fall of several percent. This would have given me a higher dividend yield.
I can’t perfectly time the market, of course, but I can look to be selective in buying a UK dividend stock that’s an opportunistic buy each month. This way, I could aim for an average yield around the 5%-6% mark.
Long-term rewards
If I put my £100 to work each and every month, it should start to add up over time. I have a couple of options when thinking about the potential value a decade down the line.
First, I could assume that I won’t spend any of the dividends I get, and reinvest all of them back into buying more UK dividend stocks. In this case, after 10 years I’d potentially have a pot worth around £16,500. This assumes a dividend yield of 6% and that none of my shares underperform, which is always a risk.
In the final year, I would have generated over £800 in dividend income alone, showing that it can add up and I can start to enjoy that benefit from the next year.
Another option would be to spend the income I receive as it comes. In this case, I’ll simply have my pot of £12,000 at year 10 (again, along as my shares don’t lose any value). However, I’ll have enjoyed the income along the way. In the last year, I’d be getting paid around £650.
I’m not including any potential capital appreciation in either scenario. In reality, I’d hope my investment pot would be considerably higher once I factor-in the long-term rising trend of the stock market.
A risk of UK dividend stocks comes from my predictions with the numbers. Dividend yields vary over time and are backward-looking figures, based on the last dividend payment. Therefore, future payments may be less or even zero depending on how the company performs.
But overall, when I consider that I’m only looking to put away £100 a month, I think the above numbers are quite impressive.