I think it’s possible to formulate a second income from dividend-paying UK shares. Here’s how.
My approach to dividend investing
Realistically speaking, I don’t have thousands stashed away I can pour into buying shares that pay consistent and stable dividends that would provide me with a decent secondary income. I think it’s more prudent to set aside a certain amount of money each month or few months to buy quality stocks that could help. For example, £100 a month is a target I undertook when my investing journey began many moons ago.
Due diligence is the name of the game when looking for stocks to help achieve my aim. However, the first thing I always remember is that dividends are never guaranteed.
As an overview, here are the main aspects of what I look for:
1) What products and services does the business offer? Does it have defensive qualities – meaning is its offering essential no matter the economic outlook – and is there proof of this during previous downturns? Is it an international business with exposure to lots of different markets that could help grow earnings and returns?
2) I then look at performance and investor returns history. I must stress that past performance is never a guarantee of the future. But, because I can’t see into the future, I’m more likely to buy shares that have a good track record compared to a mixed one.
3) Next, I want to understand my level of return. This is often checked by the dividend yield. Furthermore, I want to understand if the dividend is sustainable. Can the money the business is earning cover the returns it is promising? A balance sheet and trading updates help with this part.
4) Finally, a key component I take into account is growth aspect. This may not be the case for all UK shares but certain product or service-based businesses need to grow and adapt or they could be left behind by competitors or new technology that could hurt performance and returns.
Some UK shares on my radar
I’ll start with two stocks that could be considered contrarian, British American Tobacco and Imperial Tobacco. Tobacco businesses have been dividend investors ‘go to’ stocks in the past. However, they’ve fallen foul of ESG investing and those with ethical objections more recently. Plus, the spectre of regulation change and alternatives could dampen performance and return levels.
A safer, defensive option is National Grid. The owner and operator of the UK’s gas and electricity transmission system does not have any competitors. This defensive element offers stable performance, which in turn, offers stable returns. Gas and electricity are essentials no matter the economic situation so this looks like a good option, in my eyes.
Finally, Vodafone shares look attractive right now too. The telecoms business has been streamlining operations in recent times to make the business more robust and more investor-friendly, if you ask me. Decent returns at present could rise due to the firm’s propensity to boost its already large footprint into emerging markets such as Africa. However, competition and geopolitical instability could hamper it.
