What is a dividend yield? 5 top UK shares paying a high income

George Sweeney 15th Jul 2022 No Comments

Reading Time: 5 minutes

It’s a tough time out there for pretty much every investor on the planet. So don’t despair if things aren’t going your way. But, if you’re looking for ways to earn some income from your investments, shares with a high dividend yield can be a great place to start.

In this article, we’ll cover all the basics you should know about dividend-paying stocks. We’ll also reveal some of the top UK shares dishing out the highest dividends available right now.

Keep reading for a dividend deep-dive or click a link below to jump straight to a section…

• What is a dividend yield?
• How to calculate it
• Why dividends are useful
• 5 top British dividend shares
• How to invest
• What else investors need to know about dividends

What is a dividend yield?

Before we jump into the nitty gritty details, it’s worth doing a quick refresher on all things dividend.

When talking about dividend payments, the term you’ll come across is the ‘dividend yield’.

This is worked out by dividing the annual dividend payment per share by the share price, and then times it by 100.

 

Calculating dividend yield

Here’s an example below to show you how it works.

If the yearly dividend per share is 50p and the share price is £10, this results in a dividend yield of 5%.

The calculation looks like this:

0.5 ÷ 10 = 0.05 x 100 = 5%

Don’t worry if maths isn’t your strong suit, it’s not mine either. You can look up a stock’s dividend yield easily enough on the internet or on some investment platforms.

The best way to think of it is as your reward for holding shares. But, the yield can fluctuate as the share price moves up or down.

And, the movement goes in the opposite direction. So, as long as the dividend payment itself stays the same in pence or pounds…

• If a share price drops, the dividend yield goes up.
• If a share price rises, the dividend yield will go down.

 

Why are dividend payments useful?

They can be a great way to earn a relatively stable income from your investments.

You can then either spend that income or reinvest it to benefit from the magic of compound interest.

On the whole, dividends from certain stocks can be quite consistent.

But, it’s important to remember the payments aren’t guaranteed, so make sure you’re never completely reliant on just one source of dividend income.

Also, with the volatility we’re seeing in the markets right now, share prices are fluctuating like crazy.

This can result in some unusually high dividend yields when the price of a stock plummets.

But with inflation running so high, these high dividend yields on offer can be a great way to get some investment returns.

Ones that are at least close to the sticky inflation figures.

 

What are 5 top UK dividend income shares with a high yield?

To give you some investing inspiration, here’s a quick rundown of five of the best UK shares from the FTSE 100 index that currently offer investors a high yield:

1. Rio Tinto (RIO)

This is one of the world’s biggest mining companies. Investing in Rio Tinto gives you some decent exposure to commodities, whilst still getting to own stock in a company.

The shares have taken a decent hit recently after a strong performance with the commodities boom. But, these shares are currently paying a whopping dividend yield of roughly 12%.

At that level you can beat the reported inflation and still have a little extra return on top for good measure.

Rio Tinto has strong financials and makes good money, but mining can be cyclical.

There’s been a drop in the price of iron ore and a slowdown in demand from China, Rio’s biggest customer. So it’s not always smooth sailing.

2. Legal & General (LGEN)

L&G have long been a solid pick for investors. Even though it hasn’t provided much growth, it’s currently offering a dividend yield of just over 7%.

The business focuses on pensions, investments, and life insurance. These are fairly stable sectors which has kept the L&G share price relatively stable, even among all the recent turmoil.

But, time will tell if inflation, rising interest rates, and a potential recession could dampen future prospects.

3. Admiral (ADM)

This is a major insurance brokerage, and the stability of the income has made Admiral a pretty steady ship over the years.

Things went a bit bonkers since 2020, but so did most shares. The price has tanked lately, but only to around pre-pandemic levels.

Regardless of a recession, people still need cars. Especially if they want to keep their jobs.

And if you need a car, you need insurance, which is why Admiral are able to confidently offer a high dividend yield of over 11% right now.

Inflation could cause issues. But the company has enough pricing power to jack up insurance prices and they’re not a ‘high-end’ insurer. So they may even get more customers as drivers look for cheaper policies.

4. Glencore (GLEN)

This is another commodity-related pick. Glencore are one of the world’s largest natural resource companies.

It’s the largest miner of cobalt, a material that’s crucial to electric vehicles. It’s so well known for sourcing cobalt, it managed to sign a major deal to supply Tesla factories with the raw material.

Although the dividend yield isn’t as high as some of the other shares here, it’s currently around 5%. A level that should be manageable enough even if there’s a prolonged downturn for commodities.

5. Imperial Brands (IMB)

Cigarettes and tobacco certainly aren’t as fashionable as they used to be.

But, this is a company still making a lot of money and serving a lot of customers around the world.

The share price has been on a steep decline over the last few years. But there’s been a recent resurgence, and with a dividend yield of over 7%, cigarettes have never looked so tasty.

 

How do you invest in dividend stocks with a high yield?

First you’ll need to set yourself up with a brokerage account.

If you don’t have one set up, we created this straightforward guide on how to create an account and buy shares with eToro.

We like eToro because it’s free to have an account and there’s no fees to buy or sell shares.

They also give you plenty of access to other assets and markets outside of the UK.

So, once you’ve picked up some top dividend shares for income, you can always branch out into other types of investments if you want.

 

What else should investors know about dividend shares?

Stocks and shares paying an income can be a great tool in your investment portfolio, particularly under the current market conditions.

But, remember to stay diversified and don’t rely on any single share entirely. There’s nothing to stop the share price falling by much more than the potential dividend on offer.

If you can, it’s also worth using a stocks and shares ISA account. This way you won’t pay any tax on the dividend income from your UK shares.

Don’t forget, if you want to stay up to date with the latest investing news and market insights, make sure you check out our fun, fortnightly MoneyMagpie Investing Newsletter.

This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.