Dividends are an important source of passive income for many investors in UK shares. So it can be exciting to find FTSE 100 shares paying high yields. Those large companies feature on my watchlist of dividend stocks to buy now for my portfolio.
If I wanted to invest £5,000 into UK dividend stocks today, here are three I’d consider buying. I’d split the money evenly across them to reduce my risk through diversification.
Supermarket favourite
While its shops may look similar, Tesco isn’t really the company it was five years ago.
Tesco has now firmly put in the past an earlier accounting scandal that dogged it for some years. It has sold its significant Asian operations, allowing it to focus more on its key markets of the UK and eastern Europe. It has also seen a surge in demand for online shopping, making online sales more important to the business than ever before.
I don’t think that is all positive. For example, the delivery costs associated with online orders could dent profits. But on balance, I feel the company is focussed on strengthening its core business. The Asian sale also allowed it to improve its balance sheet, as well as returning cash to shareholders.
The supermarket giant yields 4.2% and its interim dividend jumped 20% from last year. I rank it among the top dividend stocks to buy now.
Top dividend stocks to buy now: BAT
Tobacco company British American Tobacco could also do with improving its balance sheet, in my view. Its £40bn of net debt is a risk I don’t like, so I was pleased to see that the company expects to reduce its leverage this year.
Meanwhile, I see a lot to like in this 7.5% yielding company. Its tobacco business is a cash generation machine, which allowed it to increase dividends again this year. With over two decades of annual increases, that wasn’t a surprise. But a dividend is never guaranteed, so a raise is always welcome in my book.
With iconic brands such as Lucky Strikes and a growing footprint of non-cigarette tobacco products, the company has so far been able to manage a decline in smoking in developed markets while raising its dividend. There’s always a risk that can’t continue, but right now I continue to like BAT for its dividend potential.
7%+ yield in financial services
BAT isn’t the only 7%+ yielding name on my list of UK dividend stocks to buy now. I would also consider the financial services provider M&G.
Like BAT, the company increased its dividend this year and it currently yields 7.9%. The company’s well-known name should help it continue to attract customers in its core market. With both a retail and commercial customer base, I think M&G offers broad exposure to investment management. That could also be a risk, though, if the UK economy worsens, for example due to delayed reopening or a resurgent pandemic.
Along with my other choices for allocating the £5,000, I’d consider buying M&G shares today for their income potential.
