These are stocks that you are in for the long haul due to the fact they will pay you a dividend (money). Think of these as savings accounts but stocks. Lets look at dividend stocks.
What is a dividend
A dividend is a distribution of a portion of the company’s earnings. Companies may choose to regularly reward their shareholders by paying dividends, normally these are in cash, but they can also sometimes be in stock.
Companies that consistently generate higher profits often choose to start paying dividends.
These dividends can be paid yearly, sometimes they can be twice yearly and some may be even more frequent such as quarterly or in a very few cases monthly. There can also be special dividend payouts when a company may have exceptional profits over a period of quarters for example and reward shareholders.
Dividend yield equals the annual dividend per share divided by the stock’s price per share. For example, if a company’s annual dividend is £1.50 and the stock is trading at £25, the dividend yield is 6% (£1.50 ÷ £25).
All companies on the FTSE 100 and FTSE 250 require to pay a dividend, now some may cancel these dividend payments when they are not making money and some may lower the dividend payout – hence due dilligence
How to evaluate a company
The are various methods that you should do when you search for the best and most importantly safest dividend stocks UK investors can buy are:
- Make sure that the company’s earnings and revenues are growing – can they pay the dividend basically
- Making sure the company doesn’t have any large debts
- Check out the history of the dividends to see if they are stable or even increasing
- Check the company’s dividend cover (that is the earnings per share divided by the dividends per share)
- Check the company’s payout ratio (that is the dividends per share divided by earnings per share)
What is the ex-dividend date?
This will be something you will hear or read about when you start to look at dividend stocks.
The ex-dividend date is the date by which an investor is excluded from the next dividend, this means that the stock must be purchased before the ex-dividend date. When a company announces a dividend, it will also set an ex-dividend date. If you sell the stock before the ex-dividend date, you will not receive the dividend payment.
Keep that in mind though – buy before the ex-dividend date does not necessarily mean many, many months before. Read this
A person purchasing a stock before its ex-dividend date, and holding the position before the market opens on the ex-dividend date, is entitled to the dividend. A person purchasing a stock on its ex-dividend date or after will not receive the current dividend payment.
Example
BRITISH AMERICAN TOBACCO PLC in the UK pay dividends as they are on the FTSE 100.
This is the current data, they are one of the established companies with a known dividend history
| Year ending: | 31/12/2022 | 31/12/2021 | 31/12/2020 |
|---|---|---|---|
| Dividend payments | |||
| Q4: | 54.45p* | 53.90p | 52.60p |
| Q3: | 54.45p | 53.90p | 52.60p |
| Q2: | 54.45p | 53.90p | 52.60p |
| Q1: | 54.45p | 53.90p | 52.60p |
| Total dividend for year: | – | 215.60p | 210.40p |
FTSE 100 Examples
This is just a small set of companies so you can see the yield but you can also see that we are talking established global companies here with huge revenues
| EPIC | Name | Sector | Market Capital (millions) | Annual Yield |
|---|---|---|---|---|
| AZN | AstraZeneca | Pharmaceuticals and Biotechnology | £173,571.32 | 2.09% |
| SHEL | Shell | Oil, Gas and Coal | £165,067.04 | 3.38% |
| HSBA | HSBC Holdings | Banks | £118,329.27 | 3.68% |
| ULVR | Unilever | Personal Care, Drug and Grocery Stores | £103,422.12 | 3.66% |
| BP. | BP | Oil, Gas and Coal | £86,202.84 | 3.89% |
| DGE | Diageo | Beverages | £83,402.73 | 2.07% |
| RIO | Rio Tinto | Industrial Metals and Mining | £77,642.61 | 8.89% |
| GLEN | Glencore | Industrial Metals and Mining | £73,501.25 | 3.64% |
| BATS | British American Tobacco | Tobacco | £69,789.56 | 6.98% |
| GSK | GSK | Pharmaceuticals and Biotechnology | £57,598.51 | 4.76% (4.00%) |
| AAL | Anglo American | Industrial Metals and Mining | £47,697.96 | 5.48% |
| REL | RELX | Media | £45,140.14 | 2.17% |
| RKT | Reckitt Benckiser Group | Personal Care, Drug and Grocery Stores | £41,528.92 | 3.01% |
| NG. | National Grid | Gas, Water and Multi-utilities | £38,050.21 | 4.99% |
| LSEG | London Stock Exchange Group | Investment Banking and Brokerage Services | £37,640.10 | 1.36% |
| PRU | Prudential | Life Insurance | £35,800.38 | 1.09% |
| CPG | Compass Group | Consumer Services | £33,520.56 | 1.65% |
| LLOY | Lloyds Banking Group | Banks | £33,155.10 | 4.32% |
Summary
A very good way to earn passive income but this one requires a pretty decent sum of money – probably in the 1000s to start with and you do still have to spend some time if you do this yourself.
It may be one of your later investment ideas, once you have money coming in.
Useful Links
https://www.dividenddata.co.uk/dividendyield.py?market=ftse100
https://www.exdividenddate.co.uk/
https://www.itpaysdividends.co.uk/new_index.htm
