Investors often spurn dividend income for growth to generate wealth faster – but dividend paying stocks are a good way to scoop a passive income.
Dividends are straightforward – companies reward shareholders for investing with regular payments.
These rewards typically beat high street bank and building society interest rates and are tax-free if kept below the £5,000 a year ceiling.
Over the years, even modest monthly investments in dividend paying shares can lead to a significant passive income.
While cash saving rates and fixed rate bonds paying 2% or less, picking the right funds can offer returns of 13% or more.
Even at 2%, cash savings are yielding less than inflation and savers are effectively paying the banks to take their money.
Better than bonds
Shares also benefit from compounding.
An income is generated from dividends that can be put towards buying more shares that provide an even larger income.
Dividends can also beat fixed rate bonds.
Companies try to increase their dividend payments to attract investors who provide capital to expand the business.
Fixed rate bonds are just that – the same rate pay day after pay day that is gradually eroded by inflation.
Dividend investors are always looking to pitch the return on their purchases above inflation to maintain a positive cash flow.
While investors with growth portfolios are looking for shares that will quickly increase in value, dividend investors look for those paying the best returns. Generally, they are not the same companies.
Dividend shares tend to experience less price volatility than growth shares, so keep most of their value when the market drops.
Top paying shares
Investors can look across the FTSE350 for dividend paying stocks.
The top yield is from oil and gas services company Petrofac at 13.6%.
Telecom firm Talk Talk (9.1%) and construction company Carillon (8.9%) take the other top three places.
“This yield is based on trailing 12 month yield and is not reflective of a company’s ability to continue to pay a dividend,” warned fund manager Morningstar, which compiled the list.
Before investing, check out the current dividend data.
For Petrofac, with shares priced at 351.89p, a 13.6% dividend pays 47.85p a share.
The last dividend from December 2016 paid in May was 34.14p a share.