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For income investors, interest rates are especially important as they can affect how attractive dividend shares look compared to bonds or savings accounts.
The Bank of England recently chose to hold the base rate steady at 4%, but with inflation easing and the economy slowing, most analysts expect further reductions in the next 12 months. That could be good news for a number of dividend-paying stocks that have been under pressure in recent years.
I’ve picked out three British shares I think are worth investors considering in a lower-rate environment.
Segro
Segro‘s (LSE: SGRO) a real estate investment trust (REIT) that specialises in warehouses and industrial logistics, but it’s also making moves into growth areas such as data centres. Some reports suggest global spending on data centres could hit $7trn over the next five years, which would be a major growth driver for the business.
At around 649p, Segro’s share price is down 26.8% in the past year and trades at a big discount to its trailing net asset value (NAV) of 891p per share. Its dividend yield of 4.62% isn’t among the very highest, but it’s been increased for 11 consecutive years and is well-covered by both earnings and cash flow.
For me, that reliability makes Segro a stock investors may want to weigh up. The risk here is that higher financing costs in the commercial property sector could drag on profitability, especially if demand for space doesn’t pick up as quickly as expected.
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Diageo
The Diageo (LSE: DGE) share price has had a tough few years, falling 30% since September 2020. At around £17 per share, it’s trading close to a 10-year low. Inflation’s squeezed consumer spending on non-essential goods like alcohol, with many households shifting towards cheaper alternatives.
However, falling interest rates could help bring inflation under control and boost consumer confidence. That in turn may lift spending on premium brands, which is where Diageo excels. Right now, its dividend yield stands at 4.5%, covered by earnings, and while growth was paused this year, the payout has risen at an average annual rate of 5.4% since 2010.
That said, investors should consider the risks. If inflation persists longer than expected, or if emerging markets weaken, Diageo’s recovery could take longer. Still, I think it’s an interesting stock to check out for those seeking reliable dividends in consumer goods.
United Utilities
United Utilities hasn’t been hit too hard compared to other sectors, with shares up 6.8% over the past five years. But it still stands to benefit from rate reductions as lower borrowing costs would ease the strain on its heavily capital-intensive operations.
Its dividend yield’s 4.62% and it boasts 14 consecutive years of growth. The concern is that the payout ratio sits at 133% and the company holds a lot of debt. If earnings fall any further, there’s a genuine risk of a dividend cut.
Even so, with a forward price-to-earnings growth (PEG) ratio of 0.27, the stock looks attractively valued. Earnings are already up 109% year on year and are expected to continue growing. Even if interest rates remain steady, there’s a strong chance the share price would benefit from this growth.
This story originally appeared on Motley Fool
