Investing £5k, or any other amount, in cheap dividend-paying UK shares may be an attractive option for 2021 and the long term. After all, FTSE 100 and FTSE 250 shares offer higher passive incomes than other income-producing assets such as cash and bonds.
Furthermore, dividend-paying stocks could become increasingly popular over the medium term. Their potential to deliver dividend growth, as well as a lack of opportunities available elsewhere, could turn an investment today into a surprisingly large amount over the long run.
The passive income appeal of cheap dividend-paying UK shares
The stock market crash means that many dividend-paying UK shares currently trade at cheap prices. Certainly, the stock market rally has lifted the levels of the FTSE 100 and FTSE 250 in recent weeks.
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However, many stocks still trade at considerably lower levels than they did at the start of the year. As such, their dividend yields are high in many cases. Evidence of this can be seen in the FTSE 100’s dividend yield, which currently stands at around 5%.
On a relative basis, UK shares currently offer an attractive passive income. Obtaining even 20% of the FTSE 100’s yield via cash or high-quality bonds is tough. Meanwhile, other assets such as buy-to-let bring problems such as a lack of diversification and high initial deposit requirements.
Therefore, from an income investing outlook as 2021 comes more sharply into view, dividend-paying UK shares appear to be the best option for a £5k investment, or any other amount.
Capital growth potential in a stock market rally
As well as their passive income prospects in 2021, dividend-paying UK shares could deliver capital growth in a likely stock market recovery. Their high yields suggest that, in many cases, they currently offer good value for money.
This may mean they have significant scope to deliver impressive capital returns as the economic outlook improves and investor sentiment does likewise.
Furthermore, their potential to produce dividend growth may improve during the course of 2021. Stronger operating conditions prompted by fiscal and monetary policy stimulus packages may filter through to many FTSE 100 and FTSE 250 companies.
Alongside an improving economic outlook, this may cause dividend-paying UK shares to raise their shareholder payouts. The end result could be increasing dividends, as well as rising popularity among investors that pushes their share prices higher.
Managing risks
Of course, dividend-paying UK shares are riskier than other income-producing assets. Therefore, it’s imperative that an investor checks the financial soundness of companies before investing in them. Furthermore, building a diverse portfolio of companies can help to further reduce overall risks.
Over time, a portfolio of dividend stocks could offer a potent mix of passive income and capital growth. As such, now could be an opportune moment to buy a range of them.
