How to buy and invest in dividend stocks in the UK

What are Dividend stocks?

Dividend stocks are shares in companies that distribute a portion of their profits to shareholders on a regular basis, typically quarterly or twice a year. Not all companies pay dividends. Growth-focused companies often prefer to reinvest profits back into the business rather than paying them out. Dividend stocks tend to be larger, more mature businesses with stable, predictable cash flows. 

These companies often benefit from a defensive market position driven by inelastic demand. Because consumers remain relatively insensitive to price changes, these firms can steadily increase prices alongside inflation.

In the UK, FTSE 100 dividend stocks are concentrated in sectors including banks, healthcare, energy, resource, consumer staples and utilities. 

It’s important to understand that dividends are never guaranteed. A company can cut or suspend its dividend at any time if profits fall, cash flows deteriorate, or the board decides to prioritise other uses of capital.

Key FTSE 100 dividend stocks

Some of the more well known FTSE 100 dividend stocks include:

1. Legal & General — A multinational financial services company providing life insurance, pensions, retirement solutions and investment management globally. It is one of Europe's largest asset managers and a major investor in UK infrastructure and housing.
2. Standard Life — Another giant life insurance, pensions and long-term savings business operating primarily across the UK and Europe. It focuses on helping customers manage their retirement assets through corporate pensions and savings products.
3. M&G — An international investment manager and savings provider that manages wealth for both retail and institutional clients. The company handles a massive portfolio of equities, fixed-income assets and real estate globally.
4. British American Tobacco— One of the largest tobacco companies in the world, manufacturing and selling traditional cigarettes across multiple continents. It’s also rapidly expanding into non-combustible alternatives, including vaping products, heated tobacco and nicotine pouches.
5. Phoenix Group — The UK’s largest long-term savings and retirement business, specialising in the acquisition and efficient management of legacy life insurance funds. It operates multiple brands to manage pensions and investments for millions of customers.

For investors seeking diversification, the iShares UK Dividend UCITS ETF screens the FTSE 350 to select and track the 50 highest-yielding individual stocks. 

This doesn’t guarantee any level of performance, but it can smooth over the volatility associated with single stocks. However, its total expense ratio currently stands at 0.4%, which is higher than many other passive index funds.

Key metrics for evaluating dividend stocks

Before buying a dividend stock, these are several key figures to consider:

• Dividend yield — the annual dividend per share expressed as a percentage of the current share price. A yield of 5% means you receive 5p in dividends for every 100p invested. High yields can appear attractive but they can equally signal that the market has concerns about dividend sustainability or the company's outlook. Always look beyond the headline yield

• Dividend cover — measures how many times over a company can afford to pay its dividend from earnings. It is calculated by dividing earnings per share by the dividend per share. A cover ratio above 2x is generally considered comfortable. A cover ratio below 1.5x warrants closer scrutiny, as it suggests the company is paying out a high proportion of earnings and has little buffer if profits fall

• Dividend growth — is the track record of increasing dividend payments over time. Companies that have grown their dividend consistently for many years (sometimes called dividend aristocrats or dividend heroes) can provide a degree of confidence that the payout culture is embedded in the business model, though past performance is not a guarantee of future returns

• Return on equity (ROE) — measures how efficiently a company generates profit from shareholders' equity. For dividend-paying companies, ROE is calculated after tax and after dividends, which means dividend payments directly reduce the pool used to calculate it. A high ROE alongside a sustainable dividend is often a positive signal

• Payout ratio — is the percentage of earnings paid out as dividends. A payout ratio of 40-60% is generally considered healthy, enough to reward shareholders while retaining sufficient capital for growth. A payout ratio consistently above 80% may indicate the dividend is under pressure

As with any signal, these are indicators and not guarantees.

How dividends are paid

When you hold a dividend stock through our share dealing platform, dividends are paid directly to your account as cash. As soon as practically possible after we receive the dividend payment, it is credited to your share dealing account and appears on your ledger.

Once received, you have two options: withdraw the cash, or reinvest it by purchasing more shares in the same company or elsewhere. 

Reinvesting dividends (sometimes called dividend compounding) is one of the most powerful long-term wealth-building strategies available to investors. Historically, reinvested dividends have accounted for a significant proportion of total equity market returns over long periods.

When you receive a dividend payment from us, you will also receive a Consolidated Tax Certificate (CTC), sometimes called a Consolidated Tax Voucher, which summarises UK and overseas dividends and interest paid during the tax year. This is typically issued in May or June covering the tax year just ended, and is useful for completing your self-assessment tax return. 

Dividend tax for UK investors

Dividend income is subject to UK income tax above the annual dividend allowance. For the 2025/26 tax year, the dividend allowance is £500, significantly reduced from previous years. Dividend income above this amount is taxed at:

• 8.75% for basic rate taxpayers

• 33.75% for higher rate taxpayers

• 39.35% for additional rate taxpayers

The most straightforward way to shelter dividend income from tax is to hold dividend stocks within a stocks and shares ISA. All dividends received within an ISA are free from income tax, regardless of the amount. You can contribute up to £20,000 per tax year across all your ISAs. 

For retirement-focused dividend investors, a SIPP offers similar tax efficiency with the additional benefit of pension tax relief on contributions.

Tax treatment depends on individual circumstances and can change. This is not tax advice, so please consult a qualified adviser if you are unsure of your position.

How to buy Dividend stocks with us

To buy dividend stocks with IG, you need a share dealing account or stocks and shares ISA. Once your account is open and funded, search for your chosen stock by name or ticker code and place your order. With us, UK shares are available from £0 commission per trade.

If you would rather not select individual dividend stocks yourself, IG's Smart Portfolio service offers a managed investment approach, where a team of experts selects and manages a diversified portfolio on your behalf, including income-focused options.

For further reading, see our guides on what is dividend yield, how to invest in shares, and our regularly updated FTSE 100 dividend stocks and best yielding dividend stocks articles for current income opportunities.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invest. Dividend payments are not guaranteed.