I like investing in dividend shares because they offer me the potential to receive income without having to work for it. If I wanted to invest £20,000 in UK dividend shares right now, here is how I would go about it.
Focus on my objectives
Dividend shares come in all shapes and sizes. Some have a history of increasing their payouts over decades. Others move between big dividends one year and small ones the next. Cyclical dividend stocks often have a run of years with beefy payouts only to cut back when their businesses enter a downward cycle. Some businesses pay small dividends at the moment, but have fast growing profits that could help support bigger payouts in future.
So before investing a penny, I would clarify what I am looking for from the dividend shares I buy. Part of that involves thinking about my risk tolerance. Getting the right balance between risk and potential reward could help me set realistic objectives.
Consider my timelines
If I am willing to hold the shares for decades, I might spend more of my £20,000 on shares that currently have modest dividends but high growth rates. For example, meat producer Cranswick yields 2.1% but its dividend grew by 16% last year. By contrast, tobacco company Imperial Brands has a yield of 8.5% but dividend growth is currently a lowly 1%.
Past performance is not a guide to what will happen in future though, so when trying to assess what a company might pay in future I would consider its business outlook, financial position and also its dividend policy.
Diversify my portfolio
Even if I make a lot of effort to estimate a company’s future dividends, I could get it wrong. Maybe some sudden event will shake its ability or willingness to pay dividends the way I expect.
For example, blue-chip Shell had not cut its dividend since the Second World War. But in 2020, as the pandemic took hold and demand uncertainty hit the energy industry, the oil major slashed its payout. That came as a surprise to me, a Shell shareholder at the time.
Nobody ever knows what will happen to a dividend, so I try to reduce my risk by diversifying my portfolio. That way, if one of the companies I buy cuts its dividend or cancels it altogether, the impact on my overall portfolio would be limited. £20,000 is enough to enable me to diversify across different companies and business sectors.
Buying UK dividend shares
Once I have decided how I want to focus my choices, I would put the £20,000 to work. I would invest it immediately. Although the market could fall, offering me higher yields if I wait to buy later, equally it could rise. So instead of trying to time it, I would simply buy shares today that I think offer me good value.
With £20,000, I would probably buy stocks of between five and 10 companies, spread across a variety of business areas. I think there are some bargains available to me right now among UK dividend shares. Hopefully, buying them could set up passive income streams for years to come.
Christopher Ruane owns shares of Imperial Brands. 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.