There are several elements worthy of discussing when thinking about UK dividend stocks. Primarily, it's about which are the best ones to pick. Aside from this, it's looking at what kind of dividends I'd need to get to reach a goal of averaging GBP200 a month.
Finally, it's about thinking of a way to make my investing strategy simple enough so that it can give me passive income.
UK dividend stocks I like
Polymetal International is a mining company within the FTSE 100.
2020 results were exceptionally strong, helped on by rising gold and other commodity prices. As a result, it increased the dividend payout to investors of around £480m. This currently equates to a dividend yield of 6.76%.
I think the outlook is supportive for Polymetal so would look to buy the UK dividend stock now. One risk worth noting is currency risk, as the mines in Russia and Tanzania mean exposure to very volatile currency movements. This could impact overall profits if one of the local currencies materially depreciates in value.
Another company I like at the moment is Persimmon. It's a UK-based homebuilder that's enjoying a strong period thanks to high demand in the property market. The company is also fortunate to enjoy large profit margins, which enable it to generate good cash flow, helping the payment of dividends.
For 2020, the operating profit margin as 27.6%. The dividend yield is currently at 7.9%, which is very healthy for a UK dividend stock. The main risk I can see is if we see a slump in house prices after the stamp duty holiday ends.
Or if the impact of Covid-19 sends the UK into a double-dip recession.
Trying to average GBP200 a month
Let's say I owned both UK dividend stocks mentioned above in equal quantity. This would give me an average dividend yield of 7.33%. To get an average of GBP200 a month (GBP2,400 a year), I'd need to have GBP32,742 invested in those shares.
Now that's a fair amount of money, but there's different ways of looking at it. I could have invested it in one lump, if I had such a cash amount lying around. That would be a bonus, being able to lock in the yields.
If I didn't have such a large amount, I can simply buy UK dividend stocks at regular intervals. As the yields are constantly changing based on the share price, I might need to reach a larger or smaller amount than GBP32,742 to get me GBP200 a month in passive income. That is a risk, as if yields fall, then I'd have wished I could have locked in the yields when it was higher.
But the benefit of regular investing is that it can average out my risk from buying over time. If I'd done this last year, I'd have benefited from being able to buy UK dividend stocks at a discount during the stock market crash. Overall, buying stocks with a healthy dividend yield like Polymetal and Persimmon can help me to generate passive income.
Jonathan Smith has no position in any of the shares mentioned.
The Motley Fool UK has no position in any of the shares mentioned.
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.
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