Investing in dividend shares can be a great option to earn some extra income. If I buy the right companies, the dividends should keep rolling in. It’s my favoured method of generating passive income – no side hustle required! So, here’s how I’d invest in UK dividend shares today.
Assessing the market
Before buying a stock I always research the market to see what’s out there. After all, there are many dividend shares to choose from.
Some companies aim to pay out almost all of their net income as dividends. Usually these are mature companies with little growth prospects, so instead they pay out earnings to shareholders.
There are also companies that operate in cyclical sectors, when a business goes through booms and then sharp declines in trading. Commodity companies are good examples. In fact, there’s a boom right now in many commodity markets, such as crude oil, so I’d expect companies like Shell could pay high dividends this year.
Some smaller companies may also pay dividends, just with lower yields than more mature firms. These businesses will be investing most of their cash for growth purposes, so may not have much left over to pay a dividend. But over time, the dividend may rise significantly if the business does grow.
Planning my portfolio
The next step is knowing how much I have to invest. I’d want enough to buy a few different shares at once. Then, my portfolio would be more diversified as there’s always a risk of a dividend being cut. This is certainly one risk to investing in dividend shares, but share prices can also decline. I could even lose more than I invested if this happens.
I like to buy a mix of high-yielding stocks, but also companies that have good dividend growth prospects (although they usually have lower yields).
For example, Auto Trader has a reasonable dividend yield of 1.3%, but the dividend is expected to grow by a huge 67% this year. On the other hand, Abrdn’s dividend yield is 7.4% but with no expected growth.
Selecting the best dividend payers
Now that I’ve assessed the market and know how much I want to invest, I can choose my stocks. Today, I want to add companies that are paying chunky dividend yields. I’d look to buy at least five stocks with high dividend yields to diversify my portfolio.
For example, I’d buy Rio Tinto as it has a double-digit dividend yield of 10.7%. It operates in the cyclical commodity sector though, so there are certainly risks here.
I’d also buy M&G, the financial services company. The dividend yield is a mighty 9.3%, and it would diversify my commodity exposure after buying Rio Tinto.
How I’m buying UK dividend shares
After I’ve chosen my stocks, I need to select a good broker account. Luckily there’s a great guide on The Motley Fool here. I selected one of these accounts so I could start buying my UK dividend shares. Once I’ve researched my companies, I’d invest a lump sum equally across my chosen dividend shares. Then, with my long-term view, I can hopefully watch my dividend income roll in.