I’m looking for UK dividend stocks to buy now. And there’s a good reason for that. Stock prices have been volatile for a while. And there’s much uncertainty in the air affecting investor sentiment.
But dividend yields can be a decent indicator of value. At least in the first place. And they could help guide me to stocks worth my further research time.
Compounding returns
There’s a long tradition of dividend-focused investing. And it’s well-known that, over time, a big portion of overall investor returns come from shareholder dividends.
One of the great advantages of dividend-focused investing is that it tends to slow down the often frenetic pace demanded by some investment strategies. As an investor, I can step back from day-to-day company updates and price swings. Instead, it’s possible to adopt a passive attitude to investing. Perhaps I need only check my share account every few months to make sure the dividends arrived, for example.
But a laid-back approach like that doesn’t necessarily lead to poor performance. Dividend investment strategies can produce returns on par with growth strategies and other approaches. But I reckon a reinvestment policy is one of the keys to getting the most from UK dividend stocks.
Indeed, ploughing dividends back into my investments can help to make sure I’m compounding returns. And there are several ways to do it. For example, I could opt for scrip dividends from some companies. When companies issue scrip dividends, they give shareholders additional shares instead of cash to cover the dividend.
Another method is to take advantage of the dividend reinvesting service offered by my share account provider. For a small fee, many brokers will automatically reinvest dividends back into the shares they came from.
Choosing UK dividend stocks to buy
Or I could allow dividends to build up in my share account. And when the sum is large enough, simply buy more shares. The big advantage of this method is flexibility. For example, I could choose to invest the accumulated dividends into different shares in my portfolio. Or I could even buy a new stock to increase diversification.
But I’d choose new UK dividend stocks with care. Not all dividend-paying shares would make the cut, even if they have a big dividend yield. Sometimes a high dividend yield serves as a warning. For example, many businesses operating in cyclical sectors can have high yields that are unsustainable. And that’s why I favour businesses operating in stable, defensive sectors for my UK dividend stocks.
For example, I’m keen on smoking products producer British American Tobacco, energy infrastructure supplier National Grid and food ingredients producer Tate & Lyle. I’m also considering sausage skin maker Devro and supermarket chain Tesco.
However, even though these stocks operate businesses with defensive qualities and sport decent-looking dividend yields, I could still lose money. Indeed, all shares carry an element of risk. Nevertheless, I’d embrace the uncertainties and adopt a long-term holding strategy.
And with that strategy in mind, for me, these are five UK dividend stocks to buy now.