Buying UK shares with 4%+ dividend yields could lead to more than just a generous passive income. Such stocks may become increasingly popular due to the low returns available elsewhere as a result of low interest rates. This could push their prices higher over the long run.
Furthermore, stocks with relatively high yields may offer good value for money. This could mean they have greater scope for high total returns over the coming years versus other FTSE 350 shares.
High dividend yields from UK shares
Despite the recent stock market rally, it is still possible to buy UK shares that offer 4%+ dividend yields. In fact, in the FTSE 350 alone there are currently around 50 companies that have yields in excess of 4%. This means that they could offer a far more attractive passive income than other mainstream assets.
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For example, bonds have risen in price due to low interest rates. As a result, their yields are relatively low at the present time. Cash savings may also be unattractive for the same reason, as an economic downturn has caused policymakers to become more dovish. Meanwhile, rising UK house prices mean that the yields on property across many parts of the country are relatively unappealing. That’s especially the case once higher taxes are deducted from rental income.
Long-term capital growth potential
It is undeniable that shares are more risky than cash. But the relatively high dividend yields on offer from UK shares could make them increasingly popular over the coming years. Investors who had previously relied on other mainstream assets for their incomes (and who are aware of the risks) may find themselves buying shares in larger quantities to fill the void left from lower interest rates. It is not guaranteed, but this could push up the prices of UK dividend stocks. And that could mean capital gains for their holders.
Furthermore, the high yields on offer from many UK stocks may indicate that they offer good value for money at the present time. Some companies in the FTSE 350, for example, have thus far failed to fully recover from the 2020 stock market crash. This may mean that they offer wide margins of safety that could translate into high capital returns in the coming years.
Risk management in an uncertain period
Of course, some UK shares with high dividend yields may be facing challenging futures. For example, they may be experiencing disruption caused by coronavirus lockdowns, or have weak balance sheets that have caused many investors to avoid them. They may also struggle to recover post-pandemic.
As such, it is important to check the financial strength of any business before purchasing it. Doing so could help an investor to avoid cheap shares that have poor financial prospects. Through focusing on higher-yielding dividend shares that are also high-quality businesses, it may be possible to earn a generous passive income as well as strong capital growth in a possible long-term stock market recovery.
