Arguably, 2023 has been a great year for dividend investors to buy stocks. Early in the year, rising interest rates caused prices to fall and yields to rise, creating unusually good buying opportunities.
Recently, though, stablising rates have caused stocks to go up and yields to come down. With the market expecting rate cuts in 2024, should investors rush to lock in high dividend yields while they can?
Lower rates, lower yields
In recent weeks, the macroeconomic situation in the UK has got investors thinking. As GDP turns negative, there’s a thought that the Bank of England might cut interest rates to get things moving again.
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As Warren Buffett puts it, though, interest rates are to share prices what gravity is to the apple. And share prices have started moving higher in anticipation of a weaker downward force on stocks.
The trouble for income investors is that higher prices mean lower dividend yields. Take Barclays as an example – the stock fell 21% between January and November, before a 13% recovery.
This has caused the dividend yield to fluctuate. At the start of the year, the stock had a 4.7% yield, which increased to 6% before falling back to to 5.25%.
It’s not just Barclays – with share prices going up in anticipation of lower rates next year, dividend yields are coming down more broadly. This makes it tempting to think investors should buy now.
An uncertain outlook
There’s certainly an incentive to think carefully about share prices and dividend yields. Over 20 years, the difference between investing £10,000 at a 6% return compared to a 4.7% return is £2,600.
Despite this, I think investors should be careful. There’s no guarantee the Bank of England is going to cut rates next year, especially with inflation well above its stated 2% target level.
Trying to predict what will happen with interest rates looks to me like a dangerous game. Instead, what I think investors should try to do is focus on which stocks are good value at the moment.
There are definitely shares in companies that I think can do well over time. Investors might note, for example, that Diageo hasn’t really participated in the dividend stock rally over the last few weeks.
I’m not saying the stock is without risk – at today’s prices, the company probably needs to get back to growth sooner rather than later to justify its valuation. But it hasn’t run up the way that others have.
Dividend stocks in 2024
The best thing for dividend investors to do, in my view, is to make investments that are likely to generate good returns regardless of what happens with share prices next year. That means focusing on two things.
The first is how much cash the company is going to distribute in future. And the second is whether this is a good return on an investment at today’s prices.
Generating good returns from dividend stocks comes down to these two things. If investors can manage that, I don’t think they need to worry much about where interest rates or share prices will be in 2024.
