UK dividend shares are companies that pay out profits to shareholders in the form of dividends. If I buy shares of the company, then I’m entitled to some of the profits as well. One of the things I like with this style of investing is that there isn’t really a minimum amount I can buy. If I want to invest £50 or £50,000 in one go I can do so. The difference is that the amount I invest each month will impact how much I receive!
Focusing on the yield not just the amount
The general premise is that the larger the amount of money I have invested in UK dividend shares, the larger the payout I’ll be getting. For example, if I own 1,000 shares that pay a dividend of 10p per share, I’m going to get paid more than if I own 100 shares.
However, investing more isn’t always the answer to trying to increase income potential. Another factor I can tweak is the dividend yield. The yield is a ratio looking at the dividend per share relative to the share price. If I target UK dividend shares with a higher than average yield, I won’t have to invest as much.
Let’s say that I invested £1,000 into shares with an average yield of 6%. If a friend of mine invested £2,000 into shares with a lower dividend yield of 3%, we would both get paid the same annual amount. Even though they invested twice as much as me, my higher dividend yield compensates for this.
It’s always important for me to remember though that the higher the yield I chase, the higher the risk is. If I find a company with a yield of 10% when the average FTSE 100 yield is 3%, then something could be wrong here. It could be that the business is in trouble, and the share price is falling.
£10,000 income a year from UK dividend shares
If I’m being careful, I can still find good shares with a yield above the average. But is it possible to end up making £10,000 of dividend income a year by only investing £500 a month?
In short, yes it is. The main parameter that it hinges on is the timeframe involved. If I’m wanting to reach £10,000 by the time I retire, it’ll depend on how old I am now.
For example, let’s say I invest £500 a month at the average dividend yield of 3%. In this case, it’s going to take me around 33 years to get an investment pot the size needed to generate me £10,000 a year. In my case, I’d want to speed this up, so I’m going to have to target a higher dividend yield.
If I boosted the yield up to 6%, the time needed reduces significantly. It’ll take me just over 16 years to reach my goal via UK dividend shares. In my opinion, this is the best way for me to reach my goal.
Now that I know what I’m trying to achieve, I need to pick specific UK dividend stocks. I wrote about some of my ideas, which can be read here.