UK dividend shares provide me with good income potential. By the nature of the shares, I should receive a regular dividend paid into my bank account as a shareholder. Not all stocks pay out a dividend though. High-growth and early stage companies often forgo a dividend in order to reinvest the cash back into the business. This helps to fund future growth. Therefore, UK dividend shares tend to be more mature businesses that have reached a steady state. Here are four dividend shares I’d buy now.
Looking at utilities
Utilities are a good example of a steady industry that contains some mature businesses paying out dividends. Two examples here are United Utilities and Severn Trent. Both companies operate water services. UU mainly services the North West, while Severn Trent has broader coverage around the UK. As far as dividend yields go, UU comes in a 4.79% and Severn Trent at 4.58%.
Given the state of the industry, the pandemic hasn’t impacted either business too much. In a recent trading update, Severn Trent noted that “we remain confident of delivering our full-year results in line with expectations and prior guidance.” There seems little room to worry me that the dividends are going to be cut in the near future. For the outlook, again I don’t see a massive slump in demand because the water services provided are a necessity for customers.
What are the risks? Personally, I think these are good dividend shares for me to buy now. However, one risk is the increased regulation and spotlight on sustainable services. These initiatives include the Government’s Green Recovery and the UN Race to Net Zero. To meet these standards and be seen as supporting these causes, large spending and investment in likely needed from both companies. This could drain available funds, and potentially impact the amount available for dividends.
Supermarket shares to buy now
A second mature industry that leans on dividend payouts is the supermarkets sector. Two examples that I like are Tesco and WM Morrison. The current dividend yields are 4.35% and 4.01% respectively. The pandemic saw demand remaining strong for this market, it being one of the few retail segments on the high street to maintain ground during 2020. For example, Tesco group sales grew 6.6% for the first half of the year, in comparison to the same period of 2019.
The reason I like these supermarkets as dividend shares to buy now is the diversified nature of products sold. In H1 2020, Tesco saw food sales up 9.2%, but clothing was down 11.2%. During a downturn, I expect this to be the case. When the economy is performing better, I imagine clothing sales would perform much better. I think the dividends paid for 2021 and in the future will be maintained because of both firms diversifying into areas such as fashion and homewares while maintaining their core food and drink categories.
The risk for supermarkets is their slim profit margins. Morrisons reported H1 2020 revenue of £8.37bn, yet gross profit was just £297m. Gross profit is simply revenue minus the direct costs of goods sold. This shows the high sales needed to generate some kind of profit. This is a clear risk if such a company wants to be classified as a sustainable dividend share to consider buying now.
That said, all of these shares are on my watchlist.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. 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.