The average FTSE 250 dividend yield at the moment is around 1.72%. If I look at the best-paying UK dividend stocks right now, I can find yields of almost 10%. However, just because a dividend yield is high, doesn’t mean I should always buy it. Also, even if the dividend per share is very high, this again doesn’t necessarily mean I should buy it right away. So here are my top three tips when I’m looking to buy UK dividend stocks.
Checking out the numbers and sustainability
My first tip to find the best-paying UK dividend stocks is to differentiate between a high dividend per share figure and a high dividend yield. The dividend per share is the amount I’ll receive when the dividend gets paid, multiplied by the number of shares I own.
So if 10p per share gets paid and I own 100 shares, I’ll get a total of £10. This 10p per share might be a high number versus other firms. But what about the dividend yield? Well if the share price is 100p, then the yield is 10% and very attractive! But if the share price is 1,000p, then a 1% yield doesn’t sound amazing. So my tip here is that the best-paying dividend per share stocks might not offer the best dividend yield.
A second tip is to look for the sustainability of a company paying out a dividend. After all, as a long-term investor, I want a UK dividend stock that’ll pay me out income for years to come. So the best (highest) dividend yield stock might actually not be the best one to buy. This is because the yield might be high because of a falling share price.
If a yield looks too good to be true, it probably is. The dividend might be scrapped, or at least reduced so that the yield falls closer to the average. Occasionally I can find a good company offering a yield in the 5-9% bucket that is sustainable, and these are ones I buy up quickly!
Diversifying my UK dividend stocks
The final tip I have when searching for the best UK dividend stocks is to think about a portfolio of stocks, not just one. In a similar way to when I buy stocks for capital growth, I don’t want to put all my eggs in one basket. I’d prefer to buy several stocks, each with different dividend yields, as this helps to spread my risk.
For example, I could buy shares in a company that has a dividend yield of 8%. To balance this out, I could also buy in to a business that is low risk but only has a yield of 2%. Already, if I invest equal amounts, I have a blended yield of 5%. It’s reduced the risk of owning just one stock.
Adding in more and more further reduces the company-specific risk, and allows me to average out at a yield I’m happy with overall. Not that risk can be completely eliminated as no yield is guaranteed.
Finding the best-paying UK dividend stocks is a lot about number crunching. But it’s also about thinking smart, and looking beyond the numbers and towards sustainability of income.
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