UK dividend stocks are shares in a British company that make small payments to investors a few times a year, as a form of passive income. This investing strategy is often called dividend investing. It’s very popular because, over time, shareholders can build the size of their portfolio by re-investing their dividend payments.
On its face, £250 doesn’t seem like enough to be worth investing. How much could it be worth in the long run? Even if a company pays a dividend as high as 13%, that would only generate £32.5 by the end of the year. However, I would argue that it’s exactly with these bits of spare cash, that successful small investors build large portfolios. Right now, I see two great companies that I would buy shares with if I had a spare £250.
Tobacco products
Tobacco companies are often an excellent source of passive income because they are extremely profitable businesses and frequently pay out large dividends. Manufacturing expenses are minimal and customers are also usually very loyal to their preferred brands.
There has been a shift in recent years. Smoking is generally on the decline, resulting in decreased cigarette sales, lower revenues and profits. To combat this, British American Tobacco (LSE: BATS) has made significant investments in next-generation products. So far, this has been costly since creating new brands costs money but non-cigarette revenue is growing and increased by 42% to £2bn last year. At the same time, higher pricing has helped the firm improve cigarette revenues by 4%.
Exchange rate fluctuations can also pose a danger to revenues and earnings, especially for a worldwide corporation like BAT. Moreover, tobacco stocks are not popular with many investors for ethical reasons, which may have an impact on the share price. However, the financial performance remains remarkable for the time being. Its yearly dividend has been boosted again, and it now yields 6.3%
Financial services
This possible addition to my portfolio is one of the few companies that did not suspend dividends during the early stages of the pandemic. That’s the kind of consistency that dividend investors should crave.
Legal and General (LSE: LGEN) currently issues a dividend yield of 6.5% and has made public its intentions to increase that yield in the future. There is no guarantee that this will happen of course. No company is under an obligation to pay a dividend of any sort. But it sets a good precedent and I doubt LNG would want to let down shareholders. The UK-based financial services provider has a large customer base and some good brand recognition to back up this potential shift.
There is a potential risk that newly-introduced rules on insurance renewal pricing could affect profits in the future. But these new rules could also create greater clarity for potential customers, leading to increased sales.
Holding dividend shares
Returning to the crux of the argument, £250 may not seem like much to invest, especially in UK dividend stocks. But I believe that making any small addition to my portfolio is a better use of my money than almost anything else. Roughly £16.20 in dividends at the end of the year may not seem like much. But if I continue to add small amounts of money to this portfolio over time, that pay-out will grow exponentially. Over 30 years that £250 investment would have earned me £487. Just imagine if I did this every month or every week!
James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco. 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.
