The UK stock market generates some of the most world's most generous dividends, regular payouts that companies make to reward loyal shareholders.

They are typically served up by large blue-chip companies like banks, oil explorers, insurers, tobacco manufacturers and miners, paid every three months or annually.

Younger investors typically invest dividends back into their portfolio to help their money compound and grow, while pensioners may draw them as income when they retire.

Dividends are entirely free of tax for life on shares are bought inside the annual £20,000 stocks and shares Isa allowance, as is any share price growth.

Income seekers are reaping the rewards as FTSE 100 giants such as oil giant BP and HSBC hiked their shareholder payouts once again this week.

While investing in shares is riskier than leaving money in the bank, it also offers the double benefit of a regular stream of dividend income plus capital growth when stock markets rise.

The FTSE 100 offers one of the most generous dividends in the world, with a forecast yield of 4.2 percent in 2023.

Some of the biggest names on the FTSE 100 offer some of the highest yields. For example, insurers Aviva and Legal & General currently pay income of 7.33 percent and 8.27 percent a year respectively.

British American Tobacco and Imperial Brands yield 7.44 percent and 7.18 percent.

Housebuilders Barratt Developments and Taylor Wimpey yield 7.38 percent and 7.33 percent, while Vodafone yields 8.23 percent and fund manager M&G offers one of the most generous yields of all at 9.56 percent.

Shell, Barclays, Lloyds, NatWest and HSBC also offer generous dividends of around five percent a year.

The income stream is not guaranteed as shareholder payouts can be cut at any time, as happened in the pandemic.

High yields can be particularly fragile, for example, housebuilder Persimmon yielded 20 percent last year but slashed its dividend by 75 percent in March. Today it yields 4.37 percent.

On Tuesday, BP published a "bumper" set of quarterly results, with first-quarter revenues jumping by a staggering 5.5billion due to high oil prices.

It also increased its dividend and its shares are forecast to yield six percent over the next year.

HSBC’s first-quarter revenues jumped 74 percent $20.2billion and the bank announced its first quarterly dividend in four years.

Both companies are generating plenty of cash to cover shareholder dividends but also face challenges, said AJ Bell investment director Russ Mould.

“BP has to fund the shift from fossil fuels to renewables, while doling out plenty of dividends to keep investors happy. HSBC’s profit was flattered by accounting moves.”

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Mould said investing in individual stocks is too risky for many, especially older people who need a reliable income stream and have less time to recover from a stock market crash.

Jason Hollands, managing director at fund platform Best Invest, says more cautious dividend investors should consider an investment fund instead. “This offers exposure to scores of different dividends stocks in one go, helping to reduce risk and volatility.”

He highlights Blackrock UK Income, which currently yields 3.65 percent a year with an annual charge of 0.75 percent. It has also delivered capital growth of 28 percent in the last five years.

The City of London Investment Trust has a proud track record of the increasingly its income for 56 years in a row.

It now yields 4.74 percent a year with an annual fee of just 0.33 percent, and grew 27.2 percent over five years.

For those who want an even higher income but with more risk, Abrdn Equity Income yields 6.95 percent with an annual charge of 0.65 percent.

Victoria Scholar, head of investment at Interactive Investor, said nobody should invest in shares or funds for less than five years, to give them time to recover from a stock market crash.

"They should also hold lower risk assets such as cash and bonds."

For those willing and able to take a chance on shares, the long-term rewards can be high but watch out for the short-term volatility.