If I were to list the most popular financial assets in the UK, dividend stocks would definitely earn a top spot. These Assets have been around for centuries, even before the Companies Act of 1862 mentioned them. They are a favorite for many Brits for various reasons, including significant yields and tax advantages. Here’s what this means.
If you invest in the best dividend stocks to buy now, the chances are you will earn handsome returns regularly. Plus, the first £500 you’ll bag will be 100% tax-free! Before you run off and buy these assets, let me introduce you to fundamental concepts, from the definition of dividend stocks to how and where to buy them.
In This Guide
Dividend Stocks: What is it and How it Works?
What are Dividend Stocks?
A dividend is a financial disbursement issued by a corporation to its shareholders, commonly comprising cash, supplementary shares of stock, or other valuable assets. Companies use dividends to distribute profits and reward shareholders for their investment.
Most companies pay dividends quarterly, i.e., every three months. But some payments are made semi-annually and annually. Since dividends are paid regularly, they offer investors a consistent income stream and allow interested individuals to reinvest and buy more shares through Dividend Reinvestment Plans (DRIPs). Some organisations also offer monthly paying dividend stocks, but, as I’ve discovered over the years, they are not as common and popular as quarterly, semi-annually, and annually paying dividend stocks.
Many of the companies I’ve interacted with and come across also use dividends to attract investors by offering a reliable income source and demonstrating financial stability. Additionally, some pay dividends to reward and encourage loyal shareholders to stay committed and invest more money.
Overall, dividends play a significant role in investment strategies, especially for income-focused investors, retirees, and those seeking a more predictable source of returns in the often-volatile world of stock market investing.
Characteristics of Dividend Stocks
As a rookie, I thought that companies offer cash dividends exclusively. And rightly so, since most of the organisations I came across rewarded shareholders with cash payments. However, once I started investing in stocks, I discovered that there are different categories of dividends with unique characteristics. They include:
- Regular Dividend Payments – Companies that qualify as dividend stocks consistently pay dividends to their shareholders. These payments are typically made on a predetermined schedule, such as quarterly or annually, providing investors with a reliable income source.
- Attractive Dividend Yields – Dividend yield is a key metric for dividend stocks. It is calculated by dividing the annual dividend amount by the stock’s current price per share. Dividend stocks often have higher yields compared to non-dividend-paying stocks, making them appealing to income-oriented investors.
- Strong Financial Health – Companies that pay dividends often boast financial stability and a rich history of generating consistent profits. They often have strong cash flows and balance sheets, which enable them to sustain dividend payments even during economic downturns.
- Dividend Growth Potential – Many dividend stocks aim to increase their dividend payments over time. This dividend growth is attractive to investors as it can help protect against the eroding effects of inflation and potentially enhance the total return on investment.
- Defensive Characteristics – Dividend stocks are sometimes considered defensive investments. During market downturns or economic uncertainty, they can provide a degree of stability and income, which may help offset losses in other parts of a portfolio.
Stocks that Pay Dividends in the UK
I scoured the market and identified numerous stocks that pay dividends in the UK, including:
- Unilever: Unilever’s dividends are paid quarterly. The last time the company paid dividends was on 28 March 2025, at the rate of €0.4528 per ordinary share.
- Bellway: Investors receive Bellway dividend payments twice a year. Due to exceptional performance in the last few months, this company announced that earnings per share will increase from 70.6p to 84.6p in 2025.
- Tesco: This British mega-retailer’s dividends are paid semi-annually. Last I checked, 4.25 pence per share.
- Schroders: Schroders shareholders receive dividends semi-annually. The last payment the company made was on 26 September 2024 at 6.5 pence per share.
- British American Tobacco: BAT pays dividends four times a year. The company made the last payments on 31 December 2024 at 60.06p per ordinary share. Investors received 240.24p per ordinary share of 25p for the year ended 31 December 2024.
- Severn Trent: Severn Trent’s dividends are paid twice a year. I checked with the company’s calculator tool and discovered that, as of March 2025, the company pays GBP 0.4868 per share.
- Diageo: Diageo pays an interim and a final dividend. In other words, the company’s payments are dished out twice a year. Investors received their last dividends on 17th October 2024 at 47.23 pence per share.
How to Invest in Dividend Stocks
If you’d like to invest in dividend stocks in the UK, the good news is that the process isn’t complicated. I’ve been doing this for many years and have yet to encounter a significant hurdle. Here are the steps you should follow:
Before investing, understand what dividend stocks are and how they work. Familiarise yourself with every crucial concept, such as the different types of products you have access to, their upsides, and risks. Additionally, research and study the meaning of yield, cover, and payout ratio.
This is also the best time to set your investment goals. Determine whether you want to accumulate long-term wealth or bolster your income with regular dividend payments. Don’t forget to research dividend taxation laws in the UK.
Investing in the right dividend stock is crucial to your success as an investor. You may be tempted to pick random assets with the highest yields, but this is not advisable for various reasons. For starters, high yield can be an indicator of financial trouble. It may manifest due to a significant drop in a company’s share price.
While searching for dividend stocks to invest in, I often prioritise companies with between 3-6% yield because this is a sustainable ratio. I urge you to do the same. Also, check each dividend stock’s growth history, cover ratio, and payout ratio.
After choosing the right dividend stocks, find a reputable broker in the UK. Ensure it’s regulated by the FCA and offers the assets you want to invest in. Also, before committing, check every broker’s charges, features, and online reputation.
UK brokers offer 3 types of accounts to investors interested in dividends: individual savings accounts (ISAs), self-invested personal pensions (SIPPs), and general brokerage accounts. Please familiarize yourself with all available options to increase your odds of picking the most fitting account. And while choosing the best account, factor in crucial aspects like tax efficiency, investment limits, and, most importantly, your goals.
The last step involves investing in your desired dividend stocks. It’s what you should do after setting up your brokerage account. Before hitting the BUY button, zero in on the right amount of money to invest in each dividend stock. I recommend investing around 20% of your income on these assets to strike a perfect balance between financial growth and safety. If you’re a beginner or are working with a small budget at the moment, you can start with 5-10%.
I also encourage buying on dips, especially where companies with strong fundamentals are involved. If you don’t have a big stash of money, don’t worry; it’s not a necessity. Most companies and brokers have fractional shares, so you can invest as little as 10 bucks before things look up and you have more funds at your disposal.
FAQs
Yes. Apple Inc. (AAPL) is known for paying dividends to its shareholders. While Apple was historically a growth-oriented company, it started paying dividends in 2012 and has continued to do so. The company’s dividend payments have contributed to its appeal as an investment for both growth and income-focused investors.
Yes. Dividend investing can be worthwhile in the UK for as long as you invest using a reliable stock broker. It is also crucial to carefully consider your financial goals, risk tolerance, and the specific dividend stocks you choose to invest in for maximum potential. Diversification and thorough research are also key to successful dividend investing.
The definition of a “good” dividend yield can vary depending on an investor’s goals and the current market conditions. Generally, a higher dividend yield is considered more attractive, but extremely high yields may be a sign of financial distress. A good approach is to compare a company’s dividend yield to its historical average, industry averages, and your own income needs and risk tolerance.
High dividend-paying stocks are typically identified by their dividend yield, which is calculated by dividing the annual dividend per share by the stock’s current market price. A high dividend yield compared to similar stocks in the same industry or sector may indicate the highest dividend stocks. Additionally, researching a company’s dividend history, financial health, and payout ratio can help determine the sustainability of its dividend payments.
Conclusion
Good dividend stocks are not hard to come by. Plenty are available in the UK, and I’ve introduced you to some of them. These are likely to generate significant returns, which you can use to cover living expenses, buy more of the same assets, or invest in other financial products. I often use my dividends to buy other financial assets for portfolio diversification. Depending on your financial goals, you can do the same or follow another path.
Before I sign off, let me remind you to pay dividend tax faithfully. If you fail to do that and the HMRC finds out, you will be in trouble. For starters, you may be required to pay a penalty of up to 100% of the amount you owe. But remember, only amounts that exceed the current year’s dividend allowance are subject to taxation. 2025’s allowance is £500.
Related Articles:
25,000 hours of testing 70+ brokers. Our recommended broker is Pepperstone.
Our recommended broker is Pepperstone.