Some investors try to time the market perfectly, aiming to buy and sell at the ideal time. Over a long period, this technique is almost impossible. It can result in me sitting on the sidelines waiting for a dip that simply never comes! Therefore, if I had £5k spare that I was thinking of investing, I’d look to put it to work right now. This is even more valid when looking to buy the best dividend shares.
Putting the money to work
When looking to invest for income, it doesn’t matter too much about picking the perfect time to invest. Of course, the dividend yield does change depending on the share price. A lower share price would mean a higher yield. Yet for the best dividend shares, if I’m happy with the current yield offered, I’d rather buy now than wait.
This is because the longer I wait the more risk I run of missing out on the next dividend. I have to be a registered shareholder long before the dividend payment date in order to receive it. So from my point of view, holding my cash on the side just doesn’t make sense.
Obviously, if the share I’m watching is very volatile, then waiting for a short period could be very beneficial. However, I wouldn’t favour holding my £5k in cash for any longer than necessary. After all, I’m concerned about income here, not pure capital appreciation.
The best dividend paying shares
Now that I’ve satisfied myself that trying to time the market isn’t the best idea, where should I look to invest? With £5k, I think I should be looking to have between six and 10 stocks.
Holding a good number like this is beneficial for several reasons. Firstly, it’s rare that there’s only one strong dividend paying share in the market. For example, there are currently 15 stocks in the FTSE 100 index offering a yield above 5%. I can’t comment on all of these, but it’s logical to conclude that there will be at least half a dozen that look attractive to me.
Secondly, spending my £5k on a mix of shares also allows me to spread my sector risk. If I invested in half a dozen stocks but all of them were banks, then my risk is quite high. If something negatively impacts that industry, all of my income could be in doubt.
Rather, I’d look to pick the best dividend shares from a mix of industries. This lowers my overall risk of receiving dividends.
Finally, I’d want to invest in such a way that enabled me to receive a fairly constant stream of income. For example, some shares pay out quarterly. Others pay only once or twice a year. By mixing up the dividend shares I buy, I can also mix up the payment dates to get a steady income stream.