The FTSE 100 fell again last week so UK dividend shares are now offering even more blistering yields than before, and I plan to take full advantage.
This is a brilliant time to buy LSE income stocks, I feel. Whenever share prices fall, yields automatically rise. That’s because yields are calculated by dividing a company’s dividend per share by its share price. The lower the share price, the higher the yield. A quick count shows 10 companies now yield 8% or more, three of which have double-digit yields.
Some investors are pivoting away from shares to take advantage of rising yields on government bonds such as UK gilts or US Treasuries. Ten-year gilts now yield an attractive 4.65% with scope for capital growth if bond prices rise. Yet I’m still not tempted.
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I like my blue-chips
I’d much rather buy a spread of UK dividend stocks inside a Stocks and Shares ISA, for tax-free income and (hopefully) growth.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
If I had any doubts about that, a quick glance at wealth manager M&G’s red hot 10.14% yield would stiffen my resolve. I’m usually wary of double-digit yields but this one does look sustainable. M&G’s share price should recover when markets spring back into life, as they always do in the end.
The same could apply to FTSE 100 insurers Phoenix Group Holdings and Legal & General Group, which yield a dizzying 11.4% and 9.3% respectively. Try getting that rate of income from a bond.
Capital is at risk when buying stocks. Phoenix and L&G are down 17.42% and 9.4% over 12 months. However, I see that as a buying opportunity rather than a threat, as they’re now dirt cheap, trading at 5.5 and 5.4 times earning respectively.
Naturally, it would be safer to stick my money in the bank. It’s still possible to get savings interest of 6% a year, provided I’m willing to lock my money away for 12 months. That’s tempting but the downside is that after a year, the interest will stop. By then, best buy deals are likely to be well below 6%.
Good time to buy
That isn’t an issue if I buy UK dividend stocks. I can access my money at any time, although in practice I’d have zero intention of doing that. I’d aim to hold every stock for a minimum 10 years, to allow my dividends time to compound, and their share prices plenty of opportunity to recover. Money held on deposit gives me a yield but no capital growth. Shares should do both.
The opposite is true of gold. Its price may rise but the yellow metal will never pay me a penny in income. The higher dividend yields go, the greater the opportunity cost of buying and holding gold instead.
In fairness to gold, the price is up 19.37% over the last year. Some exposure is always worth having, but no more than 5% of my portfolio. I’m investing the majority in FTSE 100 income shares. With Rio Tinto, Imperial Brands, Barratt Developments, British American Tobacco and Taylor Wimpey all yielding more than 8%, now looks like a brilliant time to consider buying them.
