Dividends - Where There's Stodge There's Brass

We live in strange times. Interest rates are scraping along the floor, and the stock market is performing exuberant aerobatics daily. Where does the risk-averse average Joe or Joess put his or her cash for a couple of years without worrying too much about it?

There are lots of possibilities, like gilts (government debt) or corporate bonds (loans to companies). But one that is often overlooked is investing for dividends. Dividends are paid by companies to shareholders when they wish to pay out some profits (assuming they've made any). Dividend yield is the latest annual dividend divided by the share price. For example, a company with a share price of 200p that's paid out a dividend of 15p has a dividend yield of (15 / 200) = 7.5%.

So a high dividend yield means a company is paying good profits relative to its share price; and the dividend yield is effectively your rate of return. Be careful though! High dividends can tell another story; sometimes a high dividend yield can mean that the share price is depressed, which in turn may mean that the company is underperforming. And an unprofitable company won't be paying any dividends at all, regardless of what it paid in the past.

Dividends are simple, but like many things financial, are surrounded by jargon like EPS and dividend cover, designed to put you off so that you'll rely on some overpaid underperforming 'professional' instead. Don't be discouraged. If you want to know all you need to here is an old but excellent primer from the top people at The Motley Fool.

Some of our dullest companies pay a good dividend, year-in, year-out. You simply buy the shares and wait for the cheque to arrive. So which company to choose? In the good old days banks were stolid and uninteresting, and always profitable. How times change. Some of the banks look cheap now, but our objective today is to find something unexciting.

British American Tobacco (LSE:BATS) might be a good choice, if you're happy with an outfit whose long-term aim is to give lung cancer to every child in the Far East. But there are even duller companies. My strategy is to choose household names who I feel will be around for a year or two, and do a bit of basic research including looking at their web-site. Utilities like Scottish and Southern Energy (LSE:SSE) are paying good dividends. Even here you need to do your research. For example, look at United Utilities (LSE:UU.) who look good at first glance; until you start looking at their recent press. If you're feeling a bit tastier how about BP (LSE:BP.)? We'll always need oil. Right?

So there are no easy answers, and your own research and gut feel are critical. So where do you research beyond simple press articles? The LSE web-site is a mine of information; and there are sites like Dividend Investor which provide a free basic service.

And where do you buy your shares? The web is a good place to start; there are many execution-only (i.e. no advice) sites. They'll charge about a tenner, and you pay 0.5% stamp duty to Gordon and Alistair, bless 'em. It's a mild pain because you'll have to open an account and deposit funds before you trade. If instead you want to talk to a human being, or failing that a trader, most banks provide a (more expensive) share-dealing service, such as Nationwide's.

If you do decide to invest for dividends, plan to hold on to them for a while; it'll take some time to wipe out the cost of buying and selling the shares, and if you've chosen right, you may even get a bit of capital growth as the shares grow in value. Good hunting.