UK income stocks can be defined as shares I can buy that will pay me a dividend. This dividend acts as income, as I get to (hopefully) retain my initial investment but have this extra money paid on top. Not all stocks pay out a dividend even in normal times. And due to the impact of the pandemic, the value of dividend cuts last year stood at over £47bn. So I need to be careful about which stock I buy in this regard. So why should I look to buy such shares at the moment?
Income stocks as a hedge
The first reason I think UK income stocks are key right now is low interest rates elsewhere. The Bank of England cut rates last year in order to help boost demand. After all, if I’m only going to be getting a fraction of 1% paid on my cash balances, it should stimulate me to use the money elsewhere instead. If I don’t want to spend it, I can invest it.
Income stocks are not a perfect substitute to earning interest on a bank account, as my capital is at risk when I buy a stock. But the yield I can get is considerably higher than the base rate. I wrote about some stocks I like here that offer yields above 6%.
Secondly, UK income stocks act as a good buffer to the growth stocks in my portfolio. The FTSE 100 index as a whole has been rather flat for the first couple of months this year. In this case, my capital gains from share price movements are very slim. During such periods, income paid via dividends can help to keep me ticking over. So UK income stocks help to provide a hedge against low cash rates and periods when growth stocks are flat.
Rewards, but also risks
A third reason UK income stocks look appealing to me now is because of the reward for being patient. As mentioned at the beginning, last year a lot of companies cut dividends. Slowly, these payments are being restored.
For example, the finance sector has been given the nod from the regulators to start paying out dividends. Barclays and NatWest are two companies that have come out and said that dividends are being resumed. So I feel that now is a good time to buy such UK income stocks as we’re potentially on the way out of the dividend drought.
There are some risks about buying stocks with the primary aim of getting dividend income. As we saw last year, companies can cut a future dividend at very short notice if needed. So I don’t have any control over whether I will get that money into my bank account. Any forecast yields or amounts that I plan to receive are simply that — forecasts.
Also, UK income stocks with generous yields typically are mature businesses in low-growth sectors. So it’s unlikely I’m going to see large share price appreciation when I’m holding the stock. On balance though, I feel these risks are tolerable given what my primary aims are.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.