If I had £5k to invest today, or any other sum, I would scour the market for top dividend-paying UK shares to generate long-term income and growth. By investing in FTSE 100 and FTSE 250 stocks, I’ll generate far higher income than I can get with cash.
Despite the recent stock market recovery, many top UK shares are still available at bargain prices. For me, a combination of a low valuation and high dividend looks too good to miss. Yes, some shares have stopped paying dividends this year, but plenty have stood by theirs. Next year, they may even start to increase them.
I am looking to invest my £5k for a minimum 10 years and ideally much longer than that. This should give my money the time it needs to blossom. I will reinvest all my dividends for long-term growth.
I’m investing for income and growth
I would consider investing my first £1k in grocery giant Tesco, which proved during the first lockdown that it is an essential service. After an initial dip in March, its share price has held fairly solid, as investors have learned to appreciate its defensive merits. This top UK share has stuck by its dividend throughout the crisis, and currently yields 4.4%.
The Tesco share price may not go gangbusters, but I think it should be one of the most attractive dividend stocks on the FTSE 100. It is also relatively cheap, trading at 12.3 times earnings.
My next £1k would go into cigarette maker British American Tobacco, which currently yields a quite astonishing 7.73%. Despite that, it trades at a bargain price of just 8.4 times earnings. Cigarette sales are declining and alternatives such as vaping have faced a regulatory backlash. But companies in this sector still generate huge amounts of cash, which they freely distribute to shareholders. Rival Imperial Brands Group yields an astonishing 9.39% and trades at just 5.8 times earnings.
My £5k is going into UK shares
After buying one of those tobacco stocks, I would look to invest in savings and investments company M&G. This has been hit by the pandemic, with first-half pre-tax profit more than halving to £309m, due to fund outflows from retail investors and shrinking annuity income margins. However, I think this could be a great long-term home for my next £1k. Its share price is incredibly low at 4.8 times earnings, while it yields 6.09%.
I would also like to invest in a housebuilder. House prices are underpinned by cheap mortgage rates and a raft of government support, from the stamp duty holiday to Help to Buy. Taylor Wimpey is particularly cheap, at 7.9 times earnings. You can find UK shares with higher yields than 2.38%, but I think there is plenty of scope for progress here.
I would invest my remaining £1k in water company United Utilities Group. It is the most expensive stock here trading at 14.7 times earnings, but that is reasonably priced given its steady income stream. The current yield is an attractive 4.7%, which beats anything you will get on cash. UK shares give me the long-term income and growth I need to fund my retirement.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.