By Shane Neagle of The Tokenist
The 100 largest companies on the London Stock Exchange (LSE) form the FTSE index. Combined together, these companies represent a market cap of almost 2 trillion pounds sterling – and it comes as no surprise that this index is full of opportunities for the enterprising investor.
However, most people looking to invest in the stock market will do so using the path of least resistance- which is to say, traditional buy-and-hold investing. While we’re not knocking that approach, and buying a diverse portfolio of stocks and ETFs does have its merits, there is one other approach that is often overlooked – but it might be just what you’re looking for.
The name of the game is dividend investing – and it offers reliable, regular payments that serve as passive income, while also giving you the benefits of appreciating asset prices.
To pull it off successfully, however, you’re going to have to keep a couple of things in mind.
The Basics of Dividend Investing
Before we move on to concrete advice, let’s take a minute to go over the basics. Dividends are small, regular payments that a company pays out to shareholders – basically redistributing the profits from a company to the shareholders. Dividends can be paid out quarterly, twice a year, or once a year – but in all cases, they present a source of passive income, and usually signal a financially healthy company.
Dividend Yield
The first and arguably most important metric to look at when considering investing in dividends is dividend yield. Put simply, dividend yield measures the percentage of a company’s current share price that is paid out in dividends each year.
Let’s use an example to illustrate. The formula used to calculate dividend yield is dividend payout divided by stock price, multiplied by 100 to get a percentage value. For our example, we’ll use British American Tobacco (BTI), which traded at £42.35 at the beginning of December, with a dividend payout of £2.74.
To calculate the dividend yield, in this case, the equation looks like this – (2.74 / 42.35) x 100 = 6.46%
Dividend Payout Ratio
Another metric to take into account is dividend payout ratio – which is the ratio of how much a business pays out in dividends in comparison to earnings per share. To calculate a company’s dividend payout ratio, simply take the amount of dividend that is paid out per share, and divide that by the earnings per share.
To use a completely hypothetical example, a business with an EPS metric of $10 that paid out a $3 dividend for each share would have a dividend payout ratio of 30%.
So, what is the importance of this metric? In one word – sustainability. The higher this ratio, the closer the ceiling – companies with high dividend payout ratios have little room to increase dividends, and this might also be a sign of deeper-rooted financial issues with the business.
A high dividend payout ratio also suggests that a business isn’t reinvesting profits into expansion – something that negatively impacts capital appreciation.
How to Find a Good Dividend Stock
It is incredibly easy to find a list of all the dividend paying stocks in the FTSE. However, sorting through it and making the best of all the available choices is another matter entirely. Here are a couple of tips to keep in mind.
One, don’t forget the metrics – we’ve already discussed dividend yield and dividend payout ratio. Keep in mind that nothing should be analyzed in a vacuum – always analyze companies in comparison to their competitors.
Some industries are more prone to dividend payments than others – as far as the FTSE goes, pharmaceutical companies and tobacco companies in particular have a history of paying out reliable dividends. While we’re on the topic of reliability, if a business has been paying out or even increasing dividends for a number of years in a row, it is usually a safe bet in terms of dividend investing.
Keep in mind, however, that there are other factors that should be taken into account. A stock’s performance vis a vis dividends is only one part of the picture – if you’re comparing two stocks and one has a better dividend yield but a far worse long-term outlook, it might be wiser to go for the stock with better long-term prospects.
Examples of Dividend Paying Stocks in the FTSE
To round things off, here is a list of some of the most popular dividend paying stocks in FTSE, along with their current dividend yields.
We’ve already used British American Tobacco (FTSE:BATS) as an example – with a dividend yield of 6.58 and fantastic returns this year, it presents a great buying opportunity.
In much the same way, Imperial Brands (FTSE:IMB) another tobacco company, is currently posting a dividend yield of 6.66 – and, just like BAT, everything looks swell on the horizon after the announcement of a large-scale stock buyback.
Leaving behind the tobacco industry, Lloyds Banking Group (FTSE:LLOY)might have had a year of sideways trading in terms of stock price – but its dividend yield is sitting at an attractive 4.68
The same holds true for HSBC (FTSE:HSBA) another company in the banking and financial services sector – with a similar dividend yield of 4.53%, but a much better year in terms of capital appreciation, it presents another good avenue for investing in dividends.
Investing in Dividends for Expats
One question we haven’t yet tackled is availability – especially for expats. The rules and regulations that govern stock trading can sometimes be incredibly complex and arcane – however, we’re happy to report that this isn’t one of those cases.
Meanwhile, due to the growing development of apps for trading shares in the UK, stock trading has become much more accessible in the United Kingdom – and this goes for expats as well. In general, a vast majority of top stockbrokers available in the UK also offer stock trading services to non-residents and non-citizens – so if you fall under one of those categories, you likely have nothing to fear.
Shane Neagle is the EIC of The Tokenist, a financial technology media publication. This essentially means he reads, learns, and writes about finance – all day. Shane is particularly interested in the way macroeconomic events impact financial markets. He also enjoys technology a bit too much, and is fascinated by the economic implications of technology’s integration in nearly all facets of our everyday lives.
Additional Resources
At Sure Dividend, we often advocate for investing in companies with a high probability of increasing their dividends each and every year.
If that strategy appeals to you, it may be useful to browse through the following databases of dividend growth stocks:
- The Dividend Aristocrats List: S&P 500 stocks with 25+ years of dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 48 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: