Do you invest in dividend shares in the UK? If so, you are among a class of investors in the best position to leverage your investment resources for maximum return. Wise investments in dividend shares can pay off big when the companies one invests in grow their earnings.
Dividend investors can take pleasure in the knowledge that their investments have done well over the past year. But as is always the case when investing in the stock market, the future is never guaranteed. Investors need to always pay close attention to market conditions, future forecasts, and the advice offered by their brokers.
As of mid-April 2016, the top 10 highest paying dividend shares in the UK were:
Standard Chartered – The London-based multinational bank was offering 9.84% at the time of this writing. Standard Chartered may not be so attractive in the near future, after threats of a credit downgrading by Standard & Poor’s in February. Their profits look to be questionable for 2016.
Glencore – Commodities and mining enterprise Glencore hasn’t fared much better with Standard & Poor’s and Moody’s recently, yet their dividend shares are still commanding a healthy 8.52%. Much of the company’s performance in the coming year will likely hinge on whether the commodities market rebounds.
Royal Dutch Shell (A+B) – Netherlands-based Royal Dutch Shell offers both A and B dividend shares offering 7.88% and 7.84% respectively. They are among the stronger performers in the energy sector, maintaining an A+ rating from Standard & Poor’s even as other energy sector companies are falling.
BP – BP has taken a lot of punishment since its Gulf of Mexico oil spill in 2010. Most analysts take a neutral stand on BP shares right now, but they look to do fairly well this year in the absence of any drastic market changes. At the time of this writing, they were offering 7.31% on their dividend shares.
Aberdeen Asset Management – Scotland’s Aberdeen Asset Management enjoys strong ratings from Fitch based on 2015 performance and future growth as a result of diversification, low leverage and more than adequate capitalisation. Their dividend shares were pegged at 7.07% in mid-April.
HSBC Holdings – The shares of HSBC Holdings are seen as either a Strong or Moderate buy among most analysts. The multinational financial services company has maintained relatively strong performance over the last several quarters, generating earnings that have allowed a 6.82% dividend to shareholders.
BHP Billiton – Australia’s BHP Billiton is among the other mining and petroleum firms struggling with the downturn in the commodities market. Despite a credit rating cut from Standard & Poor’s this past February, BHP Billiton still managed a 6.75% yield on dividend shares.
Intu Properties – Despite being a shopping centre giant in the UK, analysts say that Intu Properties has underperformed over the last 12 to 18 months. The 6.40% yield on its dividend shares is surprising given the company’s performance.
Rio Tinto – The Rio Tinto Group’s recent downgrades from both Moody’s and Standard & Poor’s is a reflection of deeper trouble within the mining industry. Its dividend yield stands at 6.38% right now, but that is expected to drop in the future if mining does not rebound.
Pearson – London-based Pearson is rated as being stable among all of the reliable ratings entities. The multinational media and publishing company enjoys a strong presence in all of the markets in which it deals. Offering 6.23% on dividend shares is reasonable given the company’s performance.
Dividends for the New Investor
The information provided above may not mean a lot to you if you are new to dividend shares. But no worries; dividend shares are not difficult to understand when you break them down into fundamental terms.
Investopedia defines a ‘dividend’ as “a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.”
In simple terms, dividends are essentially a percentage of profits generated by a company. Those dividends are then utilised in whatever way the company’s Board of Directors sees fit. Often, directors decide to keep some of the money within the organisation for reinvestment purposes while paying out a distribution to stockholders in the form of a dividend payment.
Dividend payouts are expressed using one of two means:
A monetary amount – expressed as dividends per share (DPS)
A percentage – this is a percentage of the current stock price referred to as the dividend yield.
It should be understood that shareholders must approve all dividend payments, and these can be structured as one-time payments or ongoing cash payments to stockholders. Dividend payments also do not affect the general performance of stocks. This explains why even some of the companies struggling in the mining and energy sectors are still able to pay dividends that are stronger than the general share price.
Choosing the Best Dividend Shares
Investing in dividend shares is a bit more complicated than standard shares and stocks. There are a number of reasons for this. First, companies utilise net earnings to pay dividends to stockholders. But when actual earnings do not match previously projected earnings, the shares may not be as attractive as investors thought they were at the time of purchase.
Second, companies that choose to reinvest all or a portion of their net earnings with the promise of a higher dividend yield in the future may not always be able to live up to those promises. Investors can never guarantee future growth of their portfolios because dividends rely so heavily on net profits.
Investors who know how to play the dividends game can do very well for themselves. As with any other kind of investing, dividends are great for some investors and not so great for others. An investor can never get too much advice before moving his/her money into dividend shares.