If I had £20,000 to invest in UK dividend shares today, this is how I would do it.
Rule 1: focus on quality
One common mistake I would want to avoid is just chasing a high dividend yield regardless of the underlying business prospects.
I think that puts miners like Ferrexpo and Evraz out of the picture for my portfolio despite their double-digit yields. That is because I see risks to their future earnings and dividends. Those risks exist because I think metal prices are at a high point in their cycle. On top of that, those two miners both face political risks from their operations in Ukraine.
Rule 2: spread the money
One can have too much of a good thing – and that is true in the stock market too. No matter how good a company may be, it can run into unexpected problems. So I would diversify across different companies and business sectors.
With £20,000, I would easily have enough money to let me diversify. I would put £2,500 into each of the eight shares below.
Financial services
I would start by investing in two financial services companies. Asset manager M&G yields 8.7%. I like its established reputation, which can help attract new customers. Insurer Legal & General benefits from a similarly strong brand. It pays a 6.5% yield. One risk with financial services companies is any economic downturn could lead customers to shop around for lower fees. That could hurt profit margins.
Consumer goods
I like both Surf manufacturer Unilever and retailer Tesco. They offer a 3.8% and 3% yield respectively. I expect demand for consumer goods to be resilient. Both companies enjoy strong positions in their markets. That could hopefully translate into ongoing profits, though those may be hurt by high logistics costs.
Tobacco
Last week’s results at British American Tobacco showed that it is possible to make big profits even as many cigarette smokers give up the habit. That financial dynamic translates into a substantial dividend, both at the company and its competitor Imperial Brands. I would buy both for my portfolio, recognising that declining cigarette use could well end up hurting revenues and profits.
Energy
With high energy prices, now can be a profitable time to sell oil or gas. Things may not look so rosy if prices fall and profits follow. But whatever the pricing, I see long-term sustained demand for energy so would consider a couple of such companies for my dividend portfolio. First would be BP. The energy major yields 4.0% currently. I would also buy Diversified Energy. Its unusual model of buying up aging wells carries the risks of cleanup costs eating into profits. But I think that is reflected in its hefty 10.3% yield.
Building a portfolio of UK dividend shares
If I invested £20,000 evenly across these eight shares, I would hopefully be looking at annual passive income of around £1,260.
Dividends are never guaranteed, but my risk should be reduced through the diversification I have used. Having bought the shares, I could then sit back and let others do the hard work while, hopefully, my dividend income begins to mount up.
Christopher Ruane owns shares in British American Tobacco, Imperial Brands and Unilever. The Motley Fool UK has recommended British American Tobacco, Imperial Brands, Tesco, and Unilever. 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.
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