Right now, there are some UK shares with attractive dividend yields. I think buying these stocks can help investors on their way to financial independence.
The plan is simple enough – buy shares, receive dividends, reinvest those dividends, and watch the returns grow. But investors need to be careful when it comes to working out which stocks to buy.
High-yield stocks
UK stocks are generally known for trading at lower prices than their US counterparts. The thought is that this compensates for British-listed companies having weaker growth prospects.
What this can mean, though, is there are better returns on offer from UK shares in terms of dividend yields. I think this makes the FTSE 100 and the FTSE 250 terrific places to look for dividend stocks.
Several well-known UK stocks have high dividend yields. Vodafone (12%) and British American Tobacco (10%) are two good examples from the FTSE 100.
Compounding returns at this rate can generate some impressive returns. But investors need to be careful – in both cases, the high dividend yields come with significant risks.
In Vodafone’s case, it operates in a capital-intensive industry where strong returns are hard to come by. With British Tobacco, there’s a concern about the number of smokers being in steady decline.
Nonetheless, I think there are some attractive opportunities in UK stocks at the moment. In particular, I think these are in the real estate sector.
REITs
Both Primary Health Properties and Supermarket Income REIT are FTSE 250 real estate investment trusts (REITs). They come with dividend yields of 6.7% and 7.12%, respectively.
REITs make money by owning and leasing properties to tenants. And they are required to distribute 90% of their taxable income to shareholders as dividends.
This can be a good thing, but it also brings risk. For one thing, it means the company can’t use its cash for growth, so shareholders can find they have to finance this themselves by buying more shares.
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Nonetheless, both Primary Health Properties and Supermarket Income REIT have a good track record when it comes to paying dividends. That’s why they appeal to me from an investment perspective.
Investing £10,000 per year and compounding it at 6.7% could result in an investment generating £205 per month after 20 years. And at 7.12%, the return is £236 per month over the same time period.
I think earning passive income through dividends is an important part of the picture when it comes to achieving financial independence. And REITs look like a good asset class to me to take advantage.
Financial independence
In my view, saving and investing is the best way to aim for financial independence. And I think the REIT sector in the UK is a great place to look for dividends that can be reinvested and compounded.
That’s not to say these are the only shares I’d buy – given the right opportunities, I’d be happy owning dividend stocks in any sector. But the 6%-8% yields offered by UK REITS makes them the place I’d start.
