Not only is there increasing chatter that the Bank of England might have finished increasing interest rates, but there’s talk of potential interest rate cuts next year. This could become a reality if inflation continues to moderate and if UK GDP (gross domestic product) growth contracts. In this eventuality, here are some dividend stocks that I think could do really well.
Benefitting from lower borrowing costs
A key area that could outperform would be real estate investment trusts (REITs). These companies invest in commercial and residential properties and use the tenant lease/rental income to pay out to shareholders.
When interest rates rise, this is bad for REITs. Raising new debt to fund projects is more expensive. Further, tenant demand is lower as many have to contend with cutting back on expenses.
So if we see this flip next year with lower interest rates, I think REITs could outperform. This would help investors in two main ways. Dividend-per-share payments could increase, based on higher occupancy rates. The other addition would be that the share price should rally to be closer to the net asset value (NAV) of the properties.
Two firms that tick the boxes from my perspective right now are Land Securities Group and Primary Health Properties. The current dividend yields are 6.48% and 7.12%.
One point to flag up is that there may be a time lag from interest rates falling to property companies benefitting, as it’s not an immediate impact.
Income and a defensive play
The other area that could do well for income is utility companies. The two that are on my radar are United Utilities and Severn Trent. The current dividend yields are 4.26% and 4.03% respectively.
Usually, utility firms carry a high level of debt. This is because the capital projects are large and expensive, so are funded by borrowings. For example, Severn Trent has a debt-to-equity ratio of 7.42!
High interest rates put pressure on firms with large debt piles, but if this gets reduced next year, it could significantly help things. Investor sentiment should become a lot more positive about these stocks, thanks to better free cash flow levels.
It should also aid the dividend payments as the dividend cover will likely increase. Both companies are defensive shares, meaning that it could help to protect the rest of my income portfolio if we get a stock market crash.
The risk is that even with lower interest rates, the high debt piles are going to be a problem for years to come.
I’m going to wait for some clearer signs in coming months about the future direction on interest rates in 2024. But if and when I get confident about cuts, these are four stocks that I’ll be buying.
The post 4 top dividend stocks that could win big if interest rates fall next year appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
How I’m aiming to turn a £50k SIPP into £500k+
Warren Buffett is hoarding cash! Should I do the same?
Could the Lloyds share price reach 60p?
3 FTSE defence stocks to consider buying in 2024
How I’d turn a £20k ISA into a £10k yearly second income
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group Plc and Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
