Dividend stocks are ones that pay out income to an investor like myself. There are several advantages to having dividend stocks within my portfolio, especially in the current economic environment. So if I had a spare £1,000 that I was looking to put to work, here’s how (and why) I’d look to invest it right now.

Combatting inflation

The first reason for looking to dividend stocks at the moment is due to inflation. The current rate of inflation in the UK is 2.5%. In the Bank of England meeting last week, it was noted that inflation could reach 4% by the end of the year. Why should this bother me? Well, currently my cash balances are earning next to nothing. The 2.5% rate of inflation is actually eroding the value of my money.

As an alternative, the FTSE 100 average dividend yield currently sits at just over 3%. Therefore, by putting my £1,000 into a mix of dividend stocks with yields in this ballpark, I can help to offset the impact of higher inflation. Although the dividend yield isn’t an exact replica of an interest rate, it does act in a similar way. On an annual or semi-annual basis, I’ll receive a chunk of income into my account, relative to the size of my investment.

Dividend stocks for passive income

A second reason I’d look to buy dividend stocks is that it acts as a good form of passive income. I think most people would agree that to generate income without having to exert much effort is a huge benefit. To this end, putting my £1,000 into dividend stocks can help.

There is initial effort needed, via selecting the particular dividend stock that I want to buy. I’ll put filters in place, such as by looking at the dividend cover ratio and also the dividend history. I’m looking for sustainable stocks that will be reliable in paying me out income for years to come.

Once I’ve done this and am happy with the stocks I’ve picked, the investment process becomes more passive. As a shareholder, I’ll be entitled to a portion of the dividend when it gets paid. 

A risk to this form of passive income is that dividends aren’t guaranteed in the same way that a bond coupon is. The company can decide to cut the dividend as it sees fit. During the pandemic, this is a measure that several FTSE 100 stocks took, in order to protect cash flow and the balance sheet.

A helpful addition to my portfolio

Overall, I think dividend stocks are a good option for myself as an investor right now. Not only do they help to reduce the negative impact of inflation, but it also acts as a good form of passive income.

4 thoughts on “Why I’d invest £1,000 into top dividend stocks today”

Leave a Reply