Dividend stocks are a great way to earn an income when investing and get your share of company profits from the companies you have a stake in. Typically, companies that pay dividends are pretty stable, so they tend to be blue chip stocks as well, although not always. Implementing dividend stocks into your investment strategy could give you some added diversification and a chance to benefit from compounding. Here’s how to invest in dividend stocks and how they work.
Need to know: Quite a lot of fees for services, such as mandatory withdrawal fees.
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1. Choose an online share-dealing platform. There are some that show you good dividend information, including eToro, Hargreaves Lansdown and IG, but any provider that offers the shares you’re after will work. 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 shares 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.
You can check with your share dealing provider when to expect dividends from the companies you have invested in. They may show this information with the other company financials or have a dividend calendar.
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.
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.
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 code | Company name | Annual yield |
|---|---|---|
| IMB | Imperial Brands | 7.35% |
| GSK | GSK | 6.55% |
| BATS | British American Tobacco | 6.45% |
| BT | BT.A | 6.13% |
| SDR | Schroders | 5.08% |
| LLOY | Lloyds Banking | 4.92% |
| WPP | WPP | 4.46% |
| HSBA | HSBC | 4.38% |
| ADM | Admiral | 4.37% |
| JMAT | Johnson Matthey | 4.22% |
Annual yields are correct as of October 7 2022.
Imperial Brands is a tobacco company listed on the London Stock Exchange and based in Bristol. It’s the brand behind Winston, Davidoff, West, Nobel, JPS and L&B cigarettes.
GSK is a pharmaceutical and biotech company listed on the London Stock Exchange and New York Stock Exchange. GSK is known to have developed amoxicillin, the first malaria vaccine and zidovudine for HIV infection.
British American Tobacco is a British tobacco company and the largest tobacco company worldwide based on net sales. BAT is listed on 4 stock exchanges, including the London Stock Exchange and New York Stock Exchange and is a component of the FTSE 100.
BT is a telecommunications company in London which operates in 180 countries around the world. It offers broadband, mobile phone services and subscription television. It is listed on the London Stock Exchange and is part of the FTSE 100.
Schroders is a British asset management company headquartered in London. It is listed on the London Stock Exchange and a component of the FTSE 100 index.
Lloyds is a well-known financial institution which owns its namesake high-street bank, as well as Halifax, Bank of Scotland and Scottish Widows. It is listed on the London Stock Exchange and a component of the FTSE 100.
WPP is a communication, advertising, public relations and technology company based in London. It owns a range of companies in these sectors. It is listed on the London Stock Exchange and a constituent of the FTSE 100 index.
HSBC is a British banking and financial services company with UK headquarters in Birmingham. HSBC is one of the only British banks to hold more deposits than loans with a loan:deposit ratio of 90%.
Admiral is a British financial services company with headquarters in Cardiff. It is listed on the London Stock Exchange and a component of the FTSE 100. Admiral markets the Admiral, Bell, Elephant, Diamond and Veygo brands.
Johnson Matthey is a chemicals and sustainable technologies company with headquarters in London. It is listed on the London Stock Exchange and a component of the FTSE 250.
The size of the dividend you will receive is determined by the company’s performance and the number of shares you have. Dividends are usually calculated as a percentage of a company’s earnings, and the amount you receive is often referred to as the “dividend payout ratio”.
The dividend payment you receive is calculated using the number of shares you own. For example, if you own 5,000 shares in Company XYZ, which is paying a dividend of five pence per share, you will receive a payment of £250. It works out exactly the same in the case of fractional shares (which are little pieces of shares, which are little pieces of companies, not at all confusing!)
A company’s board of directors will decide when to pay a dividend and how much to pay. While they are usually issued as cash payments, dividends can also be offered in other forms, for example as additional shares in the company.
Dividends can only be paid from a company’s profits for the current year or profits it has retained from previous financial years.
“Dividend stocks” is the term for the shares of a company that pays dividends. If an investor says that they dedicate some of their portfolio to dividend stocks then they’re generally investing in companies that tend to regularly pay out some of their profits to their shareholders.
When you own shares in a company, you own a piece of the business. As a shareholder, you’re then entitled to a share of that company’s earnings, which comes in the form of dividends. Companies don’t have to pay dividends, as they can choose to reinvest the money into the business, but ones that do so regularly will become known as a dividend stock and become popular to these types of investors.
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).
There are some pros and cons to buying dividend stocks, here’s some of the main ones:
There are a number of factors to consider when comparing which dividend stocks (dividend-paying shares) to buy:
You need to own the share before the ex-dividend date in order to receive the dividend. It’s worth knowing the process and key dates:
Finder’s investment expert Zoe Stabler answers
Yes, but it’s not as simple as investing, getting a payout and selling. Typically, on the ex-dividend date, the stock will be trading at a lower price. This is theoretically at a discount of the dividend amount, but this isn’t always the case.
This means that while you could buy the stock and get the dividend, you’ll need to wait for the stock to return to its original position (or rise further if you paid fees to make the trade) before you sell it — it’s not a quick win or easy money. There is an investment strategy that uses this idea, but a lot of analysts and experts don’t believe that it works.
Dividend capture is a type of investment strategy that does exactly this. It’s often a day trading strategy as it involves trying to time the market. Investors that use this strategy will make use of a dividend calendar and choose to purchase stocks with large dividends.
With this strategy, investors purchase shares just before the ex-dividend date, which means they are recorded on the record date as a shareholder. Once they receive the dividend, they sell the shares. This could involve holding the shares for as little as one day.
The main drawback of the dividend capture strategy is that the share price often falls after a dividend, so you’re likely to make a loss on your investment, even once you’ve considered the dividend.
In the UK, you 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 – if your dividend profit takes you into a new income tax band, you’ll need to consider this.
Get more detailed information on how dividend tax works
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! It also means that your dividends have the opportunity to earn their own dividends once they equal one share.
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.
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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