Dividend stocks are one of the most popular investment options in the UK because regular cash payments act as passive income. In exchange for providing your capital as equity, you will be rewarded with free cash (or shares) as long as you own the shares.
So why doesn’t everyone do it?
Fear on the stock market
Many people stay away from the stock market because they are worried about losses, massive crashes, or they simply don’t understand how it works. High-profile events such as the dot-com bubble and the 2008 financial crisis continue to shape the way people think about risk.
However, over the longer term, diversified UK shares have historically averaged around 6-7% per annum, compared with typical cash savings rates of around 3-4% in 2026.
This gap can make a massive difference if you’ve been saving for 10, 20 or 30 years. Still, with hundreds of companies on your list, choosing the right one can seem overwhelming.
Here, basic rules assist: focus on companies that have a history of paying dividends, solid balance sheets and manageable debt.
Simplifying dividends
Hunting for good dividend stocks really helps cut through the noise. The stock screener can filter for dividend yield, payout ratio, cash flow coverage and dividend history in one go.
For the prudent investor, a 5-6% yield that balances income with sustainability is a realistic target, while a payout ratio of less than 80% suggests that the company is not paying more than it can afford.
Another useful rule of thumb is to cover approximately one to two times the dividend with cash. Additionally, the longer a company raises its dividend year after year, the more evidence there is that management is sedate about earnings.
A good dividend is worth considering
Tobacco stocks are not for everyone, so if you have a personal objection to smoking, this may not be the right solution. Financially though British-American tobacco (LSE:BATS) may be worth considering as it has long performed as a classic high-yield dividend stock.
It pays out cash around four times a year and its current annual dividend is around 2.45p per share. The forward dividend yield is currently around 5.5%, although often exceeding 6%.
The company covered the dividend payment with profits from recent years, and the dividend payout rate forecast for 2026 is approximately 68.8%. It is in the range of 55-75%, which analysts often consider sustainable for the industry.
The latest results show consistent earnings and free cash flow that far exceed the dividend amount, although the company faces headwinds from regulatory pressure and litigation that could impact both profits and the share price.
How many net shares is £2,000 per year?
A £40,000 investment in British American Tobacco at current rates of return will yield approximately £2,100-2,200 in dividends per year before tax. Assuming the rate of return is maintained and the dividend is maintained – this can never be guaranteed.
This is consistent with the idea of aiming to raise around £2,000 per year from a portfolio generating a 5% return.
But never put all your money into one stock. To spread your risk, try to build a diversified portfolio of 10-20 stocks in different sectors, such as energy, healthcare and finance.
This way you’ll still achieve your target income of £2,000 a year, but you won’t be betting your entire future on one business.
Is it worth investing £5,000 in British American Tobacco Plc now?
If investing expert Mark Rogers and his team have stock advice, it can pay to listen. After all, Twelfth Magpie’s flagship Share Advisor newsletter, which it has run for almost a decade, provides thousands of paying members with the best share recommendations from across the UK and US markets.
Mark believes there are 6 standout stocks that investors should consider buying right now. Want to see if British American Tobacco Plc is on the list?
Mark Hartley owns shares in British American Tobacco.
