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How to Invest in Dividend Stocks in the UK | Step-by-Step

How to Invest in Dividend Stocks in the UK | Step-by-Step
Diana Paluteder

Dividend stocks can boost your overall investing returns, whether your goal is to amplify your income or create a buffer against market fluctuations. This guide will walk you through the step-by-step process of how to buy dividend stocks in the UK, the pros and cons of investing in dividend stocks, practical tips for successful investing, as well as suggestions on the best brokers to use.

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What are dividend stocks?

Dividend stocks are shares in companies that distribute a part of their earnings to shareholders. These distributions, known as dividends, are typically given on a regular basis (quarterly, semi-annually, or annually) and are expressed as a fixed amount per share or as a percentage of the current share price (known as the dividend yield).

Companies that offer dividends are often well-established with a history of generating consistent profits. Industries like utilities, consumer staples, and real estate investment trusts (REITs) are known for their high-dividend yield stocks.

How to invest in dividend stocks in the UK? 

So, how exactly do you start investing in dividend stocks in the UK? The process is more straightforward and fast than it may initially appear and follows the same process as buying any other kind of stock, and you have multiple pathways to pursue. 

One of the easiest methods (that we will explore in the next section) is opening an online brokerage account and buying shares of dividend-paying companies.

If you find that too intimidating, you can always seek the services of a professional to manage your portfolio. Regardless of your route, remember that the stock market is accessible to any investor, regardless of their budget.

How to buy dividend stocks in the UK: Step-by-step 

Here’s a comprehensive step-by-step manual for investing in dividend stocks in the UK through an online broker. 

Step 1: Select a broker

To buy dividend stocks in the UK, you need a brokerage account. So, to securely buy dividend stocks in the UK, you should consider eToro, which offers:

  • Commission-free stock trading; 
  • 2,000+ stocks from 17 exchanges;
  • Fractional shares available;
  • User-friendly platform.

Highly Rated Stock Trading & Investing Platform

  • Invest in 2,800+ stocks and other assets including 70+ cryptocurrencies and commodities.

  • 0% commission on buying stocks - buy in bulk or just a fraction from as little as $10. Other fees apply. For more information, visit etoro.com/trading/fees.

  • Copy top-performing traders in real time, automatically.

  • eToro USA is registered with FINRA for securities trading.

30+ million Users
eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. eToro USA LLC does not offer CFDs, only real Crypto assets available. Don’t invest unless you’re prepared to lose all the money you invest.

While there are numerous platforms to choose from, the one that suits you will depend on your investment approach (long-term buy-and-hold strategy or active day trading) and needs (e.g., whether you want to trade more advanced financial products such as options).

When assessing brokers, consider the following characteristics:

  • Fees: Brokerage fees are charges levied by brokers to execute your transactions or provide specialized services. Fortunately, most online brokers nowadays offer commission-free stock trading;
  • Security: Choose a reliable broker fully regulated by the Financial Conduct Authority (FCA);
  • Trading tools: Active traders might prefer brokerage accounts with advanced features. Some brokers provide fully customizable platforms with comprehensive analysis tools or access to additional data for an extra cost. Avoid paying extra for unnecessary additions. If you’re new to stock trading, a user-friendly platform with a competitive fee structure is advisable. A dedicated section with investing tips and tricks is also a bonus;
  • Access to market data: Opt for a platform that provides access to robust market research and reporting tools;
  • Fractional stock trading: Fractional shares enable investors to buy stock or exchange-traded funds (ETFs) based on the cash amount rather than the number of shares. This is particularly useful for investors with limited capital who want to build a diversified portfolio or set up a dollar-cost averaging strategy.

Step 2: Decide on the dividend stocks to buy in the UK

Picking companies that are not only strong dividend payers but also likely to continue to be for some time can seem overwhelming. So, before investing in any dividend stocks in the UK, it’s vital to familiarize yourself with the key metrics that help evaluate them. 

These indicators will give you insights into the reliability of your dividend stock and, most crucially, help you identify potential warning signs:

  • Dividend yield: Dividend yield is a key metric for comparing a stock’s current yield to its historical performance, but it’s important to consider a company’s ability to sustain and potentially increase its dividend payout when assessing unusually high yields;
  • Dividend payout ratio: Dividend as a percentage of a company’s earnings. For instance, if a company’s net income per share is $2 and it pays a dividend of $1 per share, the payout ratio is 50%. Typically, a lower payout ratio suggests a more sustainable dividend;
  • Earnings per share (EPS): This ratio normalizes a company’s earnings to the per-share value. The best dividend stocks are typically those that have consistently increased their EPS over time, leading to higher dividends. A track record of earnings growth often indicates robust competitive advantages.
  • P/E ratio: Derived by dividing a company’s share price by its earnings per share. This ratio, used in conjunction with the dividend yield, helps determine whether a dividend stock is fairly valued.

Fundamental analysis

Fundamental analysis offers a comprehensive view of your dividend stock, accounting for numerous external factors that can’t be captured by solely looking at dividends. For instance, a sound fundamental analysis will consider the following:

  • The health of the company’s balance sheet;
  • Company and industry news that could influence the share price;
  • The overall condition of the macroeconomic environment;
  • The current state of the company’s industry;
  • Market demand for the company’s products or services;
  • The company’s competitive position within its industry and its future prospects. 

Step 3: Decide your the amount to buy dividend stocks in the UK

Now that you’ve settled on a dividend stock, you’ll need to determine how much you wish to invest.

Your investment will depend on the stock price and the number of shares you want to acquire. If the share price of the company you’re interested in is financially out of reach, you can consider fractional shares. Fractional shares allow you to buy stock based on the cash amount you’re comfortable with, so you may end up with less than, equal to, or more than a whole share.

Given the stock market’s inherent volatility, you must invest in dividend stocks in the UK only what you’re willing and able to lose.

Step 4: Execute your order

Now that you’ve decided on a dividend stock and how much you want to invest, you can place your order. This involves signing in to your account and entering the ticker symbol of your desired stock into the search bar. 

Your order will typically finalize in a matter of seconds (if it’s a market order), after which your portfolio updates and displays the purchased shares.

You can choose between two options: 

  • Market order: A market order is a command to purchase the stock at the current market price, which is generally executed immediately (subject to availability); 
  • Limit order: A limit order activates once the share price hits your designated price. For instance, suppose you wish to purchase stock X at £100 or less. You would set the limit price at £100, and the order would execute only when the stock hits the set price or falls below it.

Step 5: Develop your portfolio

While it may be enticing to check the performance of your stocks daily (particularly in the early stages), it’s crucial to maintain a long-term perspective. Of course, you should review quarterly reports and subscribe to stock news alerts to keep up-to-date with the companies in which you own shares. However, if your stocks experience a minor dip in price, avoid the urge to sell out of panic. Similarly, try to resist the impulse to liquidate your position immediately if the share price exhibits a slight uptick.

In the end, the most effective and straightforward strategy for building wealth in the stock market over time is to invest in high-quality or blue-chip companies and hold onto their shares as long as they continue to perform well.

What companies pay dividends?

Large, well-established companies with consistent profits are often the best dividend payers. The sectors that have a consistent record of paying dividends include (with a few examples): 

  • Oil and gas: ExxonMobil Corporation (NYSE: XOM), Chevron Corporation (NYSE: CVX), and BP (LSE: BP);
  • Financial services: JPMorgan Chase & Co (NYSE: JPM), Bank of America Corp (NYSE: BAC), and Wells Fargo & Co (NYSE: WFC);
  • Healthcare and pharmaceuticals: Pfizer Inc. (NYSE: PFE), AstraZeneca (LSE: AZN), and Johnson & Johnson (NYSE: JNJ);
  • Technology: Apple Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), and IBM (NYSE: IBM);
  • Consumer goods: Procter & Gamble (NYSE: PG), Unilever Plc (LSE: ULVR), and Coca-Cola Co (NYSE: KO);
  • Telecom: AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ).

Additionally, companies structured as Real Estate Investment Trusts (REITs) or Master Limited Partnerships (MLPs) are obligated to distribute a specified amount of taxable income as shareholder dividends. 

Startups, such as those in the technology or biotech sectors, will likely not offer regular dividends as they typically channel their profits back into the business to fuel growth and expansion.

How are dividends taxed in the UK?

The dividend income that falls within your “personal allowance” (the annual income limit you can earn without incurring tax) is tax-free in the UK. Investors are also granted a yearly dividend allowance. Taxes are only applicable on any dividend income exceeding this dividend allowance. You can find the specifics on the gov.uk website.

Mistakes to avoid when buying dividend stocks in the UK 

As with any form of investment, dividend stocks, too, come with their own set of potential risks and pitfalls. You can refer to our comprehensive guide on the 17 common investing mistakes, complete with advice on how to steer clear of them. For now, let’s have a look at some of the most common mistakes to avoid with dividend stocks:

  • Chasing high yields: Choosing stocks with lower but steadier yields is typically wiser rather than chasing potentially fleeting high yields;
  • Ignoring payout ratios: High payment ratios might indicate a company isn’t reinvesting enough in its own growth, which could threaten future dividends;
  • Overlooking dividend growth: A company that consistently increases its dividends over time is often a wiser option than one with a high but stagnant dividend;
  • Disregarding total return: Focusing solely on dividends might cause you to miss out on stocks with high growth potential but lower dividends;
  • Not conducting fundamental analysis: Don’t invest based solely on dividend payouts. Evaluating the company’s financials, competitive position, and industry trends is crucial;
  • Not diversifying: Investing all your money in dividend stocks, or even in a single sector, can be risky. Instead, diversify your portfolio across various asset classes and sectors;
  • Not considering tax implications: Dividend income may be subject to taxes, depending on your local tax laws and the type of investment account;
  • Having a short-term mindset: Dividend investing is a long-term strategy.

Pros and cons of buying dividend stocks in the UK

Pros

Pros

  • Potential for double profits: Dividend stocks can provide a steady income stream in the form of dividends plus any price appreciation;
  • Compound growth: Dividends can be reinvested to purchase more shares, leading to compound growth over time;
  • Stability: Companies that offer regular dividend payments are typically well-established and financially stable;
  • Hedge against inflation: The income from dividends can help protect against the eroding effects of inflation.
Cons

Cons

  • Limited growth potential: As a general rule, mature companies tend to pay regular dividends, meaning they may have slower growth compared to younger, fast-growing companies;
  • Dividend cuts: Should the dividend-paying company experience financial difficulty, dividends can be reduced or stopped altogether, which can negatively affect income-focused investors and the stock’s price;
  • Overconcentration risk: Investors seeking high dividend yields might end up with a portfolio heavily concentrated in specific sectors (like energy or banks), leading to a lack of diversification.

In conclusion 

While investing in dividend stocks can present an avenue for both consistent income as well as potential growth, all investments in the stock market carry some form of risk. 

Successful investing requires a deep understanding of the market, strategic portfolio diversification, and a patient, disciplined approach. 

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

FAQs about how to buy dividend stocks in the UK

What are dividend stocks?

Dividend stocks are shares of companies that distribute a portion of their earnings to shareholders on a regular basis. These are typically in the form of cash payments, providing investors with a consistent source of income. Investors seeking a combination of income and potential for long-term capital appreciation often favor such stocks.

What are the Dividend Aristocrats?

Dividend Aristocrats are a group of companies that:

  • Are part of the S&P 500 Index;
  • Have a market cap of at least $3 billion;
  • Have an average trading volume of at least $5 million;
  • Have a proven track record of increasing their dividend payouts for at least 25 consecutive years.

How often are dividends paid on stocks in the UK?

In the UK, companies pay dividends on a biannual basis. However, the payout frequency can vary and may also occur yearly or quarterly.

Where to buy dividend stocks in the UK?

In the UK, you can buy dividend stocks through licensed online brokerages such as eToro. Always ensure the platform you choose is regulated by the FCA.

How to buy dividend stocks in the UK?

To buy dividend stocks in the UK, you’ll need to register an account with a licensed online brokerage, like eToro. Then, research and select companies known for regular dividend payouts. Purchase shares of these companies through your brokerage account. Remember to reinvest the dividends for compounded growth over time.

Highly Rated Stock Trading & Investing Platform

  • Invest in 2,800+ stocks and other assets including 70+ cryptocurrencies and commodities.

  • 0% commission on buying stocks - buy in bulk or just a fraction from as little as $10. Other fees apply. For more information, visit etoro.com/trading/fees.

  • Copy top-performing traders in real time, automatically.

  • eToro USA is registered with FINRA for securities trading.

30+ million Users
eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. eToro USA LLC does not offer CFDs, only real Crypto assets available. Don’t invest unless you’re prepared to lose all the money you invest.

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