UK dividend stocks can offer me different ways to make money. Like any stock, the share price fluctuates. If I buy the stock at one price and it moves higher, I can sell for a profit. The other avenue is to make money from the dividends paid out over time. Whereas watching the share price is ‘active’, receiving dividends is more of a ‘passive’ income stream. Here’s how I’d go about investing £5,000 in such companies.
Setting a goal
Ideally, I’ll want to have a target for my £5,000. Investing in UK dividend stocks without a clear goal doesn’t really make sense. My target could be to make a certain amount a year from the dividend income. Or it could be to achieve a certain rate of return. Usually, the dividend yield is the means by which I can calculate and compare the income returns. By measuring the proportion of the dividend per share relative to the share price, I get a percentage yield figure.
For example, the FTSE 100 average yield is around 3%. So for my £5,000, I could look to aim for a yield in excess of the average via the UK dividend stocks that I buy.
Although it’s not a perfect comparison, I can look at the yield and compare it to other income or interest-paying investments. The one that comes to mind first is the rate of interest on my bank account or Cash ISA. I need to remember that this interest is guaranteed, and there is very limited risk of losing my capital. With a dividend-paying stock, the income is not guaranteed and if the share price falls when I come to sell the stock, I could lose some of my capital.
My strategy for UK dividend stocks
I prefer to set a goal of targeting a particular yield. To go about this, my strategy isn’t just simply to calculate the dividend yields and buy the relevant stocks. It involves more than that!
One element I look for before buying any UK dividend stock is the outlook for the company. This is really important, as the dividend yield doesn’t reflect this.
For example, the dividend per share number used is the dividend that has already been declared. So the next dividend announcement in the future will be reflective of how the performance will be going forward. If the company had a great year last year but is struggling in 2021, the dividend might be lower than the previous year.
I also need to take into account the impact of the pandemic before I buy any stocks. For some companies, the pandemic meant a drain on cash and an increase in debt. Both of these points could negatively impact the dividends to be paid in the future. So ideally I want to steer clear of these types of firms in order to give myself the best chance of reaching my goal.
Once I’ve found the stocks that tick my boxes, I can split my £5,000 between them all to diversify myself. Although I’ll still need to adjust my portfolio from time to time, it should become fairly passive in nature.