Stock market

Here’s why I’ve changed my mind about buying dividend stocks for passive income.

Investing in UK dividend stocks for passive income can be a buy-and-forget strategy.

But does it really work?

I’ve tested this approach again using five popular dividend-paying stocks.

The last few years have been tough for businesses and stocks because of the tough general economic conditions we’ve been through.

But that makes the five-year backtest even more useful.

A progressive dividend policy

Energy Company National Grid (LSE:NG) often finds its way into dividend-focused stock portfolios.

The firm is selling its UK gas assets in a strategic move aimed at leaning more towards electricity. It now accounts for about 75 percent of total electricity, up from 60 percent in 2021.

One of the ongoing risks to shareholders is that the business attracts a lot of regulatory scrutiny, and this applies to its operations on both sides of the Atlantic. It is possible that the requirements for infrastructure investment will change, forcing the company to reduce its profitability.

However, so far, the dividend has increased slightly every year since 2019, and Citi analysts expect that to continue.

In November last year, the company said it expected revenue to rise. “support” Progressive dividend policy in future. Then in April, it said core earnings per share for the trading year to March 2024 would be in line with last year.

We’ll have more information on May 23 with full-year results.

But if I had bought some shares five years ago, would it have been a successful passive income dividend investment?

Positive return on investment

In May 2019, the share price was around 835p, and since then the company has paid out 254.8p worth of dividends.

So that’s an earnings return of about 30.5%.

However, today the stock is around 1,107p (9 May), so the share price has gained around 272p.

Combining the two means the overall return has been in the ballpark of 63%, which is slightly less than accounting for trading costs when buying and selling shares.

I would consider it a successful investment.

But what about other popular dividend stocks?

A financial services provider Legal and General It has fallen by around 25p per share over a five-year period and has paid a dividend of around 93p. Therefore, the overall gain was around 68p, or 25%.

Meanwhile, the ever-popular stock Lloyds Banking The dividend came in at around 9p per share but the share price lost 7p. So, the total return has been around 2p per share, which is just over 3%.

In the fast food space, Unilever has provided a total return of just over 7%, and Coca-Cola HBCIt has been around 16 percent.

With these stocks, the strategy worked

All these stocks have delivered positive cumulative returns over the past five years despite economic challenges during the period.

If I had split the money equally between all five stocks, my overall diversified portfolio gain would have been just under 23%.

There is no guarantee of positive investment results for these shares over the next five years.

However, I used to be skeptical about the potential benefits of investing in dividend stocks for passive income. But this exercise has helped me change my mind.

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