5 dividend stocks I’d buy now

In the current ‘lower for longer’ interest rate environment, SSE plc (LON:SSE), Pennon Group plc (LON:PNN), Prudential plc (LON:PRU), Old Mutual plc (LON:OML) and Target Healthcare REIT Ltd (LON:THRL) are reasonably priced income shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With interest rates likely to stay lower for longer, dividend stocks are firmly back in favour. But following the Brexit vote and the sell-off in global stock markets earlier this year, investors have bid up the share prices of reliable non-cyclical consumer and healthcare stocks to risky levels.

Investors still looking for dividends may find better value in other sectors, including utilities, financials and healthcare REITs.

Utilities

The ‘lower for longer’ interest rates outlook helps utility companies in two key ways. Firstly, lower rates reduce their financing costs. And as utilities tend to carry high debt loads, this has a significant impact on boosting profits. Secondly, lower rates cause income-oriented investors to gravitate to utility stocks, as their higher dividend yields become relatively more attractive when bond yields fall.

One stock that stands out in terms of its dividend yield and consistent performance is energy supplier SSE (LSE: SSE). The company has 14 years of consecutive dividend increases under its belt, so investors should be confident that the dividend payout is one of management’s top priorities. With a forward P/E ratio of 13.3 and a dividend yield of 5.5%, the stock is keenly priced, and is one to invest in if you’re looking for a reasonably-priced income stock.

Investors looking for a safer pick in the sector could consider water and waste management company Pennon Group (LSE: PNN). Shares in the company currently yield 3.7%, and trade at a forward P/E of 23. Although Pennon offers less in terms of yield and value, the utility company has less exposure to volatile commodity prices and invariably generates a steady return year after year.

Financials

Although low interest rates reduce the income financial companies can earn from their fixed-income investments, Prudential (LSE: PRU) and Old Mutual (LSE: OML) are set to offset much of this impact to earnings from their large exposures to the US and emerging markets.

Thanks to the 12% fall in the pound against the dollar since the Brexit vote, their foreign earnings are now worth much more in sterling terms. This improved sterling earnings translation will offer a much needed boost to their short-term earnings as margins shrink, and will compress their already low forward P/E ratios.

Shares in Prudential trade at a forward P/E of 10.9 and currently yield 2.9%. South Africa-focused Old Mutual offers a much more attractive yield of 4.4%, but trades at a slightly more expensive forward P/E of 11.5.

Property

Recent large-scale outflows from commercial property funds may put off investors from buying property assets, but there’s one sector that has remained largely immune: healthcare properties.

An easy way to gain access to the sector is to buy a healthcare REIT, such as Target Healthcare REIT (LSE: THRL). In stark contrast to commercial REITs, where most trusts trade at a sizeable discount to their net asset values, shares in Target Healthcare currently trade at a 12% premium to NAV.

While a slowdown in the commercial property sector would undoubtedly have knock-on effects on the rest of the property market, Target Healthcare’s long lease terms (average unexpired term of 29.5 years) and annual rental uplifts offer it significant protection against a potential downturn.

Shares in the REIT currently yield 5.4%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Elevated view over city of London skyline
Investing Articles

Is it time to buy this incredible FTSE dividend share?

Christopher Ruane examines one FTSE 100 share with a phenomenal dividend history. Does a steep share price fall this year…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This FTSE 100 share has just crashed another 20%. Its P/E is now just 9.9 so should I buy?

Harvey Jones was tempted to buy this FTSE 100 share after it crashed in October. Now it's crashed again, it…

Read more »

Investing Articles

Could Trump 2.0 be good for FTSE 250 stocks?

Donald Trump’s just been elected President of the United States for a second time. Our writer considers whether this could…

Read more »

Investing Articles

Trading at a 10-year low, this FTSE income stock now yields a chunky 6.99%!

Harvey Jones has been watching from the sidelines as shares in this FTSE 100 income stock just fall and fall.…

Read more »

Dividend Shares

Is a Bank of England rate cut good for the Lloyds share price?

Ken Hall analyses what the latest interest rate cut could mean for the Lloyds share price with the UK bank’s…

Read more »

Investing Articles

2 brilliant bargains I’m considering for my Stocks and Shares ISA!

These FTSE 100 and FTSE 250 shares offer exceptional value on paper. Here's why I'm considering them for my Stocks…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Dividend Shares

How much passive income could I generate with just £10 per day?

Ken Hall wants to create his £10,000 yearly passive income dream by investing just £10 every weekday day in Footsie…

Read more »

Investing Articles

Is the Rolls-Royce share price too high? Here’s what the experts say

The Rolls-Royce share price has surged over two years, representing one of the FTSE 100’s greatest success stories. But is…

Read more »