Five Questions About: Dividends

Shares pay dividends, don't they?

Not all of them. And, of those that do, the payouts can vary enormously. But if you pick the right share, dividend income can be very lucrative.

How lucrative?

Payouts to shareholders broke records last year, with dividends soaring 16.2 per cent to £80.4bn.

Brilliant! Which shares should I buy to get these great payout?

You shouldn't buy a share just for its dividends. If the share price collapses, it doesn't matter how big the payout is, you'll lose money. The secret to getting decent dividend income is to spread your cash carefully around different shares.

If I do so, what sort of returns should I expect?

In 2012 UK equities yielded 4.5 per cent. But bigger companies tend to offer better returns. While large cap stocks – those in the FTSE 100 – yielded 4.6 per cent last year, those in the FTSE 250 yielded an average 3.3 per cent.

That's better than a deposit account. So should I invest?

Buying shares is risky. If you're not prepared for the possibility of your money shrinking, avoid them. There are dividend funds which spread the risk by buying a lot of shares. They're a safer option, but returns will probably be lower.