Investing a relatively small amount in many people’s eyes may mean a major risk if you are new to financial markets. Everyone has to start somewhere, and investing your first £1,000 in the stock market can be a daunting prospect.
Being an inexperienced investor also means it may be tricky to decide where to actually place your funds in order to get the best returns on your investment.
While each individual’s appetite for risk differs, of course, for investors new to the stock market I would recommend focusing on some big FTSE 100 stocks with solid reputations. This may not provide the same growth opportunities as smaller companies and those from emerging markets might offer, but as a first investment I think it makes more sense to err on the side of caution until you find your feet.
These companies represent two of the highest dividend yields in the UK’s primary stock index, with Imperial’s forecast for 2019 at 7.8% and Direct Line even higher at 7.9%.
Elevation or stagnation?
These dividend returns can be taken in two ways. On the one hand some investors take these high dividends as an attractive reason to buy, and it will often offset sluggish share price rises to boost overall returns.
However, some see this as a practice of stagnating businesses with limited growth potential, who are unwilling to reinvest profits to further benefit the company.
Whichever side of the debate you are on, buying high dividend stocks with steady growth should lead to a greater return on your £1,000, or however much you choose to invest.
Imperial Brands’ share price has faced difficulties in recent years, at least in part due to the existential difficulties faced by the tobacco industry in the midst of changing consumer trends, but stable financials and a move towards next-generation products (NGP) mean that it remains an attractive FTSE 100 stock to me.
Regulatory clampdowns on some of its products has also contributed to a share price fall of more than 34% in the last two years, but I believe this represents a significant buying opportunity.
Survival of the fittest
Another FTSE 100 dividend stock that could reap rewards for your £1k investment is insurance provider Direct Line.
The firm’s selling point has long been that it sells its car, home and life insurance products directly to consumers rather than through comparison sites, but the group is now rolling out its new brand Darwin and will begin to appear on such platforms.
Darwin will be a digital-only brand that uses artificial intelligence and machine learning to generate prices, a step which shows a willingness to innovate alongside shareholder dividend payouts.
This may hit profit margins, which historically the company has massively outperformed the sector in, but the board clearly sees the new approach as well worth it.
Chief executive Paul Gueddes has overseen a prosperous decade for Direct Line, but will step down in the summer to be replaced by current CFO Penny James. The shares have fallen more than 8% in April already, which for me could represent a buying opportunity while dividends remain high.
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ConorC has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.