I expect these FTSE 100 and UK small-cap stocks to pay more meaty dividends next year. Here is why.
The PRS REIT
Residential landlord The PRS REIT (LSE:PRSR) could fall in value again next year if interest rates remain above normal levels. However, signs that inflationary pressures are abating fill me with optimism heading into the New Year.
Real estate investment trusts (REITs) like this can be excellent selections for income investors. This is because they are obliged to pay a minimum of 90% of annual rental profits out in the form of dividends.
This particular small-cap share could be a particularly great buy for dividends, too. Residential rents are still rapidly climbing as Britain’s lettings shortage worsens. The average monthly tenant cost was up 8.9% during the 12 months to November, latest data from HomeLet show.
Such a favourable trading environment underpins City expectations for PRS to keep paying above-average dividends. For the financial years to June 2024 and 2025, its dividend yields stand at 4.8% and 5.1%, respectively.
I believe the firm will be a great buy for passive income beyond next year, too, as market supply issues likely drag on. Estate agent Savills expects the average rent to rise another 6% next year. Growth is tipped to cool thereafter, although rents are still tipped to rocket 18.1% between 2024 and 2028.
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Rio Tinto
Troubles in the commodities-hungry Chinese economy pose an ongoing danger to mining companies. This is especially threatening to major iron ore producers such as Rio Tinto (LSE:RIO), too. More than two-thirds of the world’s supply is shipped into China’s ports.
However, I believe this particular FTSE 100 miner is still an attractive stock to buy for next year. Firstly, China’s government and central bank have stepped in already to support the manufacturing and property sectors. And more stimulus measures would be likely in the case of further stress.
Secondly, I think the threat posed by China’s spluttering economy is baked into Rio Tinto’s low valuation. Today it trades on a price-to-earnings (P/E) ratio of 9.8 times for 2024. This is well below the Footsie average of 12 times.
Dividends at mining companies are famously sensitive to commodities demand. But based on current forecasts, the miner looks in good shape to meet its 6% yield for next year.
That predicted payment is covered 1.7 times over by expected earnings. This is just below the minimum safety benchmark of two times. But Rio Tinto’s strong balance sheet gives dividend estimates decent protection (net debt to underlying EBITDA here stood below 0.4 times as of June).
Its robust financial position also gives the FTSE firm the firepower to invest for future profit and dividend growth, too. Just today (Monday, 4 December) it finalised a $700m deal for a 50% equity stake in the Matalco aluminium joint venture.
