How to invest in dividend stocks in the UK

Dividend stocks are a useful way to earn an income when investing and get your share of company profits. Typically, companies that pay dividends aim for stability, so they tend to be blue-chip stocks as well, but not always.

Buying dividend stocks for your investment portfolio could give you some extra diversification and a chance to benefit from compounding. Here’s how to invest in dividend stocks, what to look at when comparing shares and what to consider first.

How to buy dividend stocks in the UK

1. Choose an online share dealing platform. There are plenty of great providers out there. It’s worth finding a share dealing account that suits your needs. 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 (NI) number.
3. Deposit funds. You’ll need to fund your trading account using a bank transfer, debit card or credit card.
4. Research the dividend stock you want to buy. Do some wider research on the company you’re interested in and search the platform using the name or stock ticker.
5. Buy your dividend shares. Set a buy order for your desired amount of shares in a company or a dividend ETF. 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.

How do dividends work?

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 profit (earnings), known 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 5 pence per share, you will receive a payment of £250.

Dividend yield is another measure that compares the dividend payout against the current share price as a percentage. It works out exactly the same in the case of fractional shares (which are smaller pieces of whole shares).

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.

What are dividend stocks?

This is simply a name used for a company that pays dividends. If an investor says they dedicate some of their portfolio to dividend stocks, then they’re generally investing in companies that tend to pay out some of their profits to their shareholders as income.

When you own shares in a company, you own a piece of the business. Companies don’t have to pay dividends, as they can choose to reinvest the money into the business for growth. But ones that do so regularly will become known as dividend stocks and tend to be popular with investors looking for income.

How you can make money with dividend stocks

Dividend stocks can make money for shareholders in 2 ways:

1. Income. Providing a (relatively) predictable source of income from regular dividend payments.
2. Growth. By going up in value over time (called capital appreciation).

Dividend payments are usually made every quarter (4 times a year), although some shares pay out just once or twice per year. Of course, dividend payment amounts and schedules can vary. And dividend payments are never guaranteed.

It’s also worth noting that some companies do not pay dividends at all. For example, a new company might plough all its profit back into the business to fuel growth.

How long do you have to own a stock to get the dividend?

You need to own the share before the ex-dividend date to receive the dividend. It’s worth knowing the process and key dates:

• Declaration date. This is the date that a dividend is announced – this is the point at which investors spring into action to decide whether to invest. This is also when you’ll find out the following dates.
• Ex-dividend date. This is the day after the final date at which you need to buy a stock to receive the dividend payment. Buying a stock on the ex-dividend date would not entitle you to the upcoming dividend.
• Record date. This is usually one day after the ex-dividend date and is when a company pulls together a list of the shareholders that owned the stock on the day before the ex-dividend date – these are the shareholders that will get a dividend.
• Payment date. This is the day the dividend is paid.

Can you buy stocks just to get the dividend?

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 investment strategy

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 who 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.

Compare share-dealing platforms to buy 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 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 the 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 it 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.

Are dividends taxed?

In the UK, you get a dividend allowance each tax year. In the current tax year, it’s £500. This means you don’t need to pay tax on any dividend income up to that amount.

If you earn more than £500 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 £500 allowance – if your dividend profit takes you into a new income tax band, you’ll need to consider this.

• If your total income is under £12,570: 0%
• If you are a basic rate taxpayer: 8.75%
• If you are a higher rate taxpayer: 33.75%
• if you are an additional rate taxpayer: 39.35%

Get more detailed information on how dividend tax works

Dividend tax calculator

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Pros and cons of buying dividend stocks

There are some pros and cons to buying dividend stocks, here’s some of the main ones:

Are there any risks of dividend stocks?

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

It’s also vital that you research the whole company and it’s financial performance, don’t get stuck in the weeds of all the dividend data. If the stock drops in value, that negatvitity could outwiegh the benefit of getting a dividen payment.

How does a dividend reinvestment plan work?

Some companies offer investors a dividend reinvestment plan (DRIP). If you opt in, this allows you to use your dividends to automatically buy more shares, which can help avoid additional brokerage fees.

A downside of signing up for a DRIP is that you don’t receive a traditional dividend payout in cash, so you 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 dividend payment date. Also, you sometimes have to sign up directly with a company (rather than a brokerage).

Bottom line

Investing in companies that pay dividends can be a smart move. Payments aren’t guaranteed, but they can be an excellent wealth-building tool. Keep your eyes peeled for any possible taxes, using a stocks and shares ISA is the best way to simplify your taxes when investing in dividend stocks.

Remember, dividends have traditionally played a key role in wealth building, contributing about a third of total stock returns over the last 100 years. However, the lion’s share of returns, about two-thirds, has come from share prices going up – this reflects the trade-off between companies paying out profits to shareholders and reinvesting those profits to grow. It’s about striking the right balance for your investment strategy.

Frequently asked questions

• How long do you have to hold a stock to get a dividend?

  To receive a company’s dividend for that quarter, you need to be on record as a shareholder at least one day before the dividend date.

• Can you buy dividend stocks through ETFs?

  You can own dividend stocks as part of an exchange-traded fund (ETF), which are baskets of different stock market investments. However, you can’t choose which company stocks the fund buys, as this is done by the fund manager (who also charges a management fee). We have a whole guide to dividend ETFs, so read it to learn more.

• What is a dividend aristocrat?

  A dividend aristocrat is a company that has increased its dividend payouts annually for at least 25 consecutive years, signifying consistent growth and stability.

  While dividend aristocrats showcase consistent growth and stability, past performance is not a guarantee of future results. Always conduct thorough investment research.

• What types of companies pay good dividends?

  Companies that consistently pay good dividends are often found in stable, mature sectors. The S&P 500 Dividend Aristocrat index includes 66 US companies that have increased their dividend payouts for at least 25 years in a row. As of June 2023, an analysis showed industrials (24%) and consumer staples (23%) as the 2 top sectors.

  These sectors generally have predictable cash flows and strong market positions, allowing regular dividend increases. Materials and financials also form significant portions, at 12.8% and 10.7%, respectively. However, every sector has dividend-paying companies, so it’s important not to ignore other sectors like healthcare, real estate or information technology.

• Are dividends the most important thing for growing wealth?

  Dividends can play a significant role in wealth growth, but they aren’t the sole factor. Since 1926, dividends have contributed about a third of total return, while capital gains (increases in stock prices) have accounted for two-thirds. Essentially, while dividends provide a steady income, the majority of growth typically comes from stock price appreciation. Personal circumstances also matter.

  For example, if you’re seeking passive income, dividends may be more significant. However, a balanced approach considering both dividends and stock-price appreciation often works best.