Investing in companies that pay dividends is similar to holding cash in a high-interest savings account. The money you invest creates more money while you sleep, like a second income.

The difference is, the stock market provides opportunities to earn far higher returns than any savings account. That’s because highly profitable companies tend to have a lot of spare cash to spend, and returning it to shareholders is a great way to attract new investors.

So it isn’t uncommon to see UK companies pay out 7% (or more) on each share.

But unlike a savings account, the overall value of your investment can drop if the share price falls. If it keeps dipping and doesn’t recover, all those dividend gains will be negated by capital losses.

So how can I be sure the companies I invest in won’t flop next year?

Identifying quality businesses

Just because a company’s listed on the London Stock Exchange doesn’t mean it’s a stable, profitable business. Products and services come in and out of favour, and competitors are never far off. So a company that was winning one year could fade away the next.

That’s why the best dividend-paying companies are those that sell common, everyday products and services that are timeless. Think finance, utilities, healthcare, groceries — no matter what happens, people will always need these things.

Here’s a few popular examples of UK dividend shares and their yields:

• Legal & General – 7.5%.
• Hilton Food Group – 6.7%.
• Investec – 6.3%.
• Imperial Brands – 6%.
• National Grid – 4%.

Another interesting option to think about when targeting reliable income is a real estate investment trust (REIT) such as LondonMetric Property (LSE: LMP). REITs benefit from corporation‑tax relief on the condition they pay out 90% of profits to shareholders.

As you can imagine, that significantly reduces the chance of a dividend cut. But not entirely — it has a highly leveraged balance sheet, so if interest rates remain high it might struggle to cover debt. That could threaten dividends.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

LondonMetric specifically focuses on long‑lease logistics properties with long-term revenue visibility, further cementing the reliability of its payouts.

The yield currently sits just below 7% and is the second-highest on the FTSE 100. It’s been growing at an average rate of 5.56% for the past 10 years.

A key metric to look at in REITs is the weighted average unexpired lease term (WAULT) — basically, how many years of predictable income is locked in. For LondonMetric, it’s around 18 years — longer than any other major REIT that I’m aware of.

Plus, it enjoys 98% occupancy. That matters, because empty properties cost money. I’m not a shareholder yet as I own several other REITs, but it’s definitely one worth a closer look.

Targeting a 7% yield

To maintain an average 7% yield over the long run requires careful portfolio balancing, including some less-established (but high-yielding) stocks to bring up the average. That adds risk.

But it’s achievable and, over time, reinvesting those dividends leads to compound growth that can build a sizeable retirement pot. 

Even just £200 a month could compound to almost £130,000 in 20 years, based on my calculations. That would pay out close to £10,000 a year with a 7% yield.

The trick is patience, consistency and careful stock assessment.

Should you invest £5,000 in LondonMetric Property Plc right now?

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Mark Hartley owns shares in Legal & General and National Grid.