Buying top dividend stocks allows me to take advantage of the income payments that get distributed. If I buy a good selection of such stocks, then I can build up a good stream of income a few years down the line. At the moment, there are several reasons why I think that dividend-paying stocks are the way to go.
Strong income potential
One of the main reasons that I’m looking to top dividend stocks now is due to low interest rates elsewhere. The Bank of England base rate is currently at just 0.1%. High inflation in the UK might force the central bank to raise rates soon. Yet this is likely to be by between 0.1% and 0.25%. This might be a worry for companies with hundreds of millions of pounds worth of debt on their books, but for me this interest rate change won’t make much of a difference when it comes to income.
Other income-paying assets such as bonds are also correlated in some way to the base interest rate, so have seen yields come down since the start of the pandemic.
When looking at the yields of top dividend stocks, there are some attractive figures. In fact, half a dozen stocks in the FTSE 100 offer me a yield in excess of 8%. Now, I know that it’s often not the wisest choice to buy the stock with the highest yield, as I wrote about in detail here. But even the average FTSE 100 yield now sits above 3.5%, giving me good options across the board.
I do need to be aware that top dividend stocks do offer me a risk in that the share price could fall, giving me an unrealised loss on my capital. This is a risk that other income-paying deposits or assets might not have.
Defensive stocks with income potential
Another reason for liking dividend stocks at the moment is because of uncertainty in the market. The FTSE 100 fell below 7,000 points on Friday. This came from fears around inflation and also a China slowdown.
I can’t predict the future, but what I can do is give myself multiple ways of trying to generate a profit. Therefore, if I buy stocks that offer me good levels of income, even if the share price suffers in the short term I’ll be able to bank some dividend income.
I can even look to buy defensive stocks, such as supermarkets or utilities. If I buy shares from this area that also pay out a dividend, I think that whatever happens in the broader economy, I can be confident of making my money work hard for me.
Long-term goals with top dividend stocks
Finally, the best time for me to start looking to build up to a set amount of passive income in the future is right now. By investing small amounts regularly into the market, I’ll be able to benefit from compounding in the years to come.
This final reason also helps me to take the stress out of trying to pick the best time to buy stocks for income. If I’m averaging-in my purchases each month, I’m less reliant on the swings in the market that can occur.
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jonathansmith1 and The Motley Fool UK have no position in any share 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. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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