Dividend stocks are getting a lot of attention right now. These are stocks that pay shareholders a cash income, out of company profits, on a regular basis.
Personally, I’m not surprised by the interest in dividend stocks as I think they can play a very valuable role within investment portfolios in the current financial environment. Here’s a look at four reasons I’d buy UK dividend shares for my own portfolio today.
Dividend stocks can provide protection
One big advantage of dividend stocks is that they tend to be less volatile than growth stocks. This means that they can potentially provide an element of portfolio stability.
We’ve certainly seen this in 2022. While plenty of high-growth stocks have fallen 30% or more this year in the recent market sell-off, a lot of dividend stocks have held up very well.
For example, one of my favourite UK dividend payers, Tritax Big Box REIT, is only down a few percent, year to date. By contrast, electric vehicle manufacturer NIO – which a lot of UK investors own – is down more than 25%.
Of course, dividend shares can still be volatile at times and payments can be cut, or even axed. However, in general, they tend to offer more stability than high-growth stocks.
Protection from inflation
Another major attraction of dividend stocks is that they can provide inflation protection. They can do this in two ways.
Firstly, they can generate a return for investors (dividends) in the near term. When inflation is high, it’s better to get a near-term return than one in the future, because the return in the future is going to be worth less in today’s terms.
Secondly, rising yields (from companies raising their dividend payouts) can help offset inflation. One example of a company that just raised its dividend is alcoholic beverages company Diageo. In January, it said it would be increasing its dividend payout by 5%.
Two ways to profit
A third advantage of dividend stocks is they can provide healthy investment returns. Right now, many UK dividend payers offer yields of 4%, or higher. That’s much better than the current interest rates offered on savings accounts. However, dividends are not the only source of return here. It’s also possible to generate capital gains from these shares.
The fact that these stocks offer two potential ways of generating a profit makes them very appealing, to my mind. It’s worth noting however, that dividends are never guaranteed, and it’s possible to lose money with dividend stocks.
Passive income potential
Finally, investing in dividend stocks can be a great way to generate passive income – the ‘holy grail’ of personal finance. With these stocks, investors get paid regular cash income for doing absolutely nothing.
This means they can potentially provide financial freedom. By putting together a portfolio of high-quality UK dividend shares, investors can generate a passive income stream that grows every year.
Overall, there’s a lot to like about dividend stocks, especially in the current environment. Given their advantages, I plan to keep buying them for my portfolio in 2022, and beyond.
