Investors have faced a tough start to the quarter, with steep downturns across major stock markets. Amid continuing volatility, those following a single-minded growth strategy may be looking at a long recovery.
In these conditions, it’s easy to see the appeal of dividend stocks, which deliver a return by paying a monthly, quarterly or annual dividend from a company’s profits. These returns can be achieved even during volatile periods and often even if the company’s share price falls.
If receiving a regular income from your investment portfolio appeals to you, perhaps now is the time to explore income investing.
Investing for income vs investing for growth
To start with the basics, we must understand that investing in stocks and shares can generate a return in one of two ways.
Firstly, the shares you buy might increase in value over the period of ownership, meaning that you can sell them at a higher price than you bought them for and pocket the difference (minus costs and taxes). Pursuing capital gains this way is described as growth investing.
This strategy relies on identifying companies with the best growth prospects and, usually, investing in them for the long term.
Secondly, if the companies you buy shares in make a profit during the period of ownership, they may distribute some of that profit to shareholders in the form of dividends.
Buying shares in these companies is a strategy known as income investing. Income investors aim to select well-established, profitable companies for their portfolios, potentially with high expected dividend yields.
It’s also useful to remember that in the UK, you won’t pay tax on either type of returns if they are held in an Isa.
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How much will you earn?
To compare the expected return from dividend stocks, one important ratio to look at is the dividend yield. This shows the dividend per share as a percentage of the share price.
For example, if you bought shares at £80 each and these pay an annual dividend of £4 per share, your dividend yield would be five per cent. In 2025, a dividend yield of above six per cent would be considered high for a FTSE 100 stock. Right now, around 14 offer a higher yield than that.
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However, dividend yield should never be taken in isolation as an indicator of a stock’s strength; it only describes the relationship between the dividend per share to the share price.
As such, a declining share price can have a positive impact on a company’s dividend yield in the short term if the company maintains its dividend payments – but if a declining share price is due to underperformance of the business, this higher yield could soon prove to be unsustainable.
So, before buying into a dividend stock, be sure to look into the context behind the yield and at other performance metrics, including the dividend cover. Consider the company’s long-term prospects of profitability and what it adds to your portfolio.
Advantages and disadvantages of income investing
Some of the reasons you might consider income investing include if you’re hoping to reduce the impact of market downturns on your overall portfolio, or if you want a somewhat predictable return on your investment, since dividends are typically paid at regular intervals.
For those perhaps nearer the end of their investment journey than the start, predictability might be key.
So dividends rather than share price growth may appeal if you don’t want to wait for years for growth to take effect, if you’ll be relying on payments from your investments to cover specific costs or supplement your regular income, or if you simply have a lower risk tolerance, since equities with the highest growth potential often involve the greatest risk.
However, you should note that:
- Dividend payments are not guaranteed and so should not be relied upon as your only source of income
- By only focusing in income investments, you may miss out on more lucrative opportunities (particularly during periods of market recovery)
- If you withdraw your investment gains rather than reinvesting them, you will be limiting the longer-term growth potential of your portfolio.
Of course, you don’t have to pivot entirely to income investing. You may want to achieve a balance of growth and income investments within your portfolio to withstand a range of market conditions.
You also don’t have to withdraw the dividends paid on your investments – you can choose to reinvest them if you’d prefer to see the value of your portfolio grow, through the process known as compounding.
Choosing income investments
If you’re considering adding income investments to your portfolio, you might look at companies with a strong history of paying or increasing dividends, or income funds with an investment objective of providing regular income payments.
Choosing dividend stocks gives you more control over the companies you invest in. As such, you should be sure you’ve fully researched the companies in question and feel confident in the expected share performance. Gains, losses, and changes to dividend yields will all have a magnified impact if you only invest in a small number of companies.
With an income fund, the fund manager will select investments in alignment with the fund’s objective. Funds are considered lower risk than stocks since they offer in-built diversification.
If you’re looking to further reduce the risk profile of your portfolio, you might include some bonds, which also fall into the category of income investments. These are considered lower risk than equities but also tend to offer lower returns. Some income funds may include bonds as part of their stable performance.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.