How to invest in dividend stocks in the UK

Find out how to invest in dividend stocks and compare a list of the best dividend stocks. [2021 updated]

With world stock markets in a state of flux during the current coronavirus pandemic, many would-be investors are considering a first-time foray into buying company shares. While we don’t have a crystal ball to predict future stock market performance, our guide can explain how to invest in dividend stocks.

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

How to buy in dividend stocks in the UK

1. Choose an online share-dealing platform. If you’re a beginner, our table below can help you choose.
2. Open your account. You’ll have to provide personal information such as your ID, bank details and national insurance number.
3. Confirm your payment details. You’ll need to fund your trading account with a bank transfer, debit card or credit card.
4. Research the stock that you want to buy. Do some wider research on the company that you’re interested in buying stock in, and also check out its past share performance using your new account.
5. Search the platform for the stock code of your chosen shares. You’ll need this to purchase the shares.
6. Buy your shares through the online platform. It’s that simple.

Compare share-dealing platforms to buy dividend stocks

Table: sorted by promoted deals first
Name Product Ratings Finder rating Customer rating Min. initial deposit Price per trade Frequent trader rate Platform fee Offer Link
FREE TRADES
Stake
Finder score
★★★★★
User survey
★★★★★
★★★★★
Expert analysis
★★★★★
User survey
£50
US: £0
N/A
£0
Join and receive a free share worth up to £100

Capital at risk

Platform details
FREE TRADES
eToro Free Stocks
Finder score
★★★★★
User survey
★★★★★
★★★★★
Expert analysis
★★★★★
User survey
$200
£0
N/A
£0

Capital at risk

Platform details
Degiro Share Dealing
Finder score
★★★★★
★★★★★
Expert analysis
Not yet rated
£0.01
UK: £1.75 + 0.014% (max £5)
US: €0.50 + $0.004 per share
N/A
£0

Capital at risk

Platform details
interactive investor Trading Account
Finder score
★★★★★
User survey
★★★★★
★★★★★
Expert analysis
★★★★★
User survey
£0
£7.99 (with one free trade per month)
N/A
£9.99 per month

Capital at risk

Platform details
Finder Award
OFFER
Freetrade
Finder score
★★★★★
User survey
★★★★★
★★★★★
Expert analysis
★★★★★
User survey
£0
£0
N/A
£0
Claim your free share worth between £3 and £200. Capital at risk.

Capital at risk

Platform details
loading

Compare up to 4 providers

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

Best UK dividend stocks (top 10)

Below is a list of the best dividend stocks on the FTSE 250 as of February 3 2021, ordered by their dividend yields. We give more detail into the companies underneath.

Wait, what's a dividend yield?

Dividend yield is the amount that a company pays in dividends relative to the market value of one share. It’s worked out by dividing the dividend per share with the share price and multiplying it by 100.

This is a nice way to compare the dividends that companies pay, but, as stock prices change all the time, this does too.

Stock codeCompany nameAnnual yield
DGOCDiversified Gas & Oil9.25%
HMSOHammerson9.09%
CEYCentamin7.57%
TCAPTP ICAP7.30%
DLGDirect Line Insurance Group7.24%
GCPGCP Infrastructure Investments6.89%
PLUSPlus5006.80%
FSFLForesight Solar Fund6.74%
NESFNextEnergy Solar Fund6.69%
JUPJupiter Fund Management5.90%

Annual yields are correct as of February 3 2021.

Diversified Gas & Oil

Diversified Gas & Oil is an independent owner and operator of producing natural gas and oil wells. It operates in Tennessee, Kentucky, Virginia, West Virginia, Ohio and Pennsylvania. It’s grown over the last few years.

Hammerson

Hammerson plc is a real estate investment trust. It owns, manages and develops retail destinations in Europe. It owns and operates destinations such as Brent Cross in London, Dundrum Town Centre in Dublin and Italie Deux in Paris.

Centamin

Centamin is a mineral exploration and mining company based in the UK. It mines precious metals, primarily gold, in the Arabian-Nubian shield. It operates the Sukari Gold Mine in the Eastern Desert of Egypt.

TP ICAP

TP ICAP is a leading capital markets business based in the UK. It provides independent data to its clients including live and historical pricing content and advanced valuation and analytics.

Direct Line Insurance Group

Direct Line Insurance Group is a leading insurance business based in the UK. It owns Direct Line, Privilege and Green Flag.

GCP Infrastructure Investments

GCP Infrastructure Investments is a closed ended investment fund that invests in UK infrastructure projects with long-term, public sector backed revenues. It’s designed to provide regular, sustainable, long-term dividends.

Plus500

Plus500 is an investment broker and CFD provider in the UK. It’s listed on the London Stock Exchange.

Foresight Solar Fund

Foresight Solar Fund Limited aims to provide investors with a sustainable quarterly dividend. It manages solar infrastructure funds on behalf of institutional and private investors.

NextEnergy Solar Fund

NextEnergy Solar Fund is a diversified portfolio of more than 91 solar assets. It’s a Guernsey incorporated investment company that’s focused on aquiriting solar photovoltaic assets in the UK. NextEnergy Solar Fund has invested £950 million in high quality solar assets.

Jupiter Fund Management

Jupiter is an active fund manager which aims to help its clients achieve their investment goals. It manages equity and bond investments, particularly in markets in the UK, Europe and Asia.

What are dividend stocks?

When you buy a number of shares in a company (also referred to as having “stock” in that firm), you’re effectively buying a piece of the business, which means you’re a part-owner. As a shareholder, you’re then entitled to a share of that company’s earnings, which comes in the form of dividends.

This means that dividend stocks (also known as dividend-paying shares) are ones that make regular payments to the investors who have bought them.

Dividend stocks can make money for shareholders in two ways: by providing a predictable source of income from regular dividend payments, and by going up in value over time (called capital appreciation).

Dividend payments are usually made on a quarterly basis (four times a year), although some shares pay out just once or twice per year. Of course, dividend payment amounts could start to vary over time depending on the financial performance of the company that you’ve bought stock in.

It’s also worth noting that some company shares do not pay dividends at all. For example, if it’s a relatively new company and all profits are being ploughed back into the business to promote growth (and ultimately, to build up the share price valuation and the prospect of paying dividends in the future).

Why should I buy dividend stocks?

Pros

  • Dividend payouts provide a regular investment income.
  • You can also sell the shares on for a profit if they rise in value over time.

Cons

  • If the company you own shares in hits hard times, it may reduce the dividend payout to investors.
  • The value of shares can decrease as well as increase.
  • Tax. As dividends form part of your income, you may need to pay tax on any dividend payments you receive.
  • No guarantee. You can’t rely solely on dividends, as there’s no guarantee that companies will pay out.

How to compare dividend stocks

There are a number of factors to consider when comparing which dividend stocks (dividend-paying shares) to buy:

  • Dividend yield. This is the total value of dividend payouts over one year, represented as a percentage of the share price. For example, if a company pays out £1 per share in annualised dividends, and the stock price is £10 per share, then that is a dividend yield of 10%. A high dividend yield is a good sign for investors, but be mindful to check that the company is in a healthy enough position to sustain that high figure in future. Also, if you are a novice investor, beware of falling into the “dividend yield trap”. This is where a very high dividend yield is not as good a prospect as it seems, because the % yield has hit an unusual high due to a falling stock price, which might signal troubled times at the company.
  • Payout ratio. This is the dividend expressed as a percentage of a company’s net income. If a company earns £2 per share in net income and pays a £1 share dividend, its payout ratio is 50%. A lower payout ratio indicates that the dividend is more sustainable.
  • Total return. This is the overall performance of a stock, combining any rise or fall in share price with the dividend yield. For instance, if a share price rises by 6% over one year, and the share has an annual dividend yield of 5%, its total return is 11%.
  • Earnings per share (EPS). This figure is a company’s profit per share, so is calculated by taking a firm’s quarterly or annual income and dividing it by the number of shares that exist in that company.
  • Price-to earnings (P/E) ratio. This is calculated by dividing a company’s current share price by its EPS. A higher ratio suggests that investors expect higher growth from the company compared to the overall market.

Paying tax on dividends in the UK

In the UK, individuals get a dividend allowance of £2,000 each financial year, which means you don’t need to pay tax on any dividend income up to that amount.

If you earn more than £2,000 from dividend payouts then how much tax you’re liable for depends on whether you’re a basic, higher or additional rate income tax payer in your normal day-to-day job.

These are the tax rates payable on dividends over the £2,000 allowance:

  • Basic rate tax payer – 7.5%
  • Higher rate tax payer – 32.5%
  • Additional rate tax payer – 38.1%

How does a dividend reinvestment plan work?

Some companies offer investors a dividend reinvestment plan (known as a DRP). If you opt in, this allows you to use your dividends to buy more shares in that company, instead of receiving the dividend payment in cash.

One of the main advantages of doing this is that you can buy extra shares without paying any more brokerage fees to your share-dealing platform. It’s also a good way to increase your holdings in a company over time with little or no active effort on your part!

A downside of signing up to a DRP is that you don’t receive a traditional dividend payout in cash, so won’t have that as a form of regular income. You also don’t get to choose at what share price you buy the additional shares – they’re automatically purchased on your behalf on the date of the dividend payment.

Are there any risks?

One issue to be wary of is investing in a company based solely on its history of dividend payments. Just because a company has a high dividend yield doesn’t mean it is a safe and stable investment, so do plenty of research before handing over your money.

Some companies will also offer dividends in the form of shares (as a DRP, explained above), which can sometimes seem like an unattractive option for investors looking for an instant cash return. However, these dividend reinvestment plans can be a great way for you to invest further and gain a bigger share of a company, so consider the merits of reinvesting before making a decision.

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