UK interest rates rise – how does that affect dividend stocks?

interest rate rise dividend

The Bank of England raised interest rates today, for the first time in 10 years. The official bank rate has been lifted from 0.25% to 0.50%.

The increase cancels out the cut we saw last year, when the central bank cut interest rates to emergency levels in the wake of the UK’s decision to leave the European Union.

So what does that mean for dividend stocks? Will I be changing my investment strategy?

Dividend stocks still offer appeal

Interest rate increases, in theory, should be bad for stocks. But as I explained in this article here, when it comes to financial markets, what happens in reality is often very different from what the textbooks predict.

For example, looking back a decade ago, the Bank of England raised interest rates four times between August 2006 and July 2007, from 4.75% to 5.75%. What happened to the FTSE 100? The index rose from around 5,900 points to 6,700 points in that time.

So in my view, an interest rate rise is just short-term noise. Dividend stocks still offer considerable long-term appeal, especially relative to savings accounts.

Dividend stocks vs savings accounts

Let’s say the banks are able to pass on today’s rate rise to savers. The interest rates on high-interest savings accounts may rise from around 1.2% to 1.4% perhaps.

That’s still an abysmal savings rate. With inflation running at 2-3% a year, money in a high-interest savings account is diminishing over time.

In contrast, a dividend stock with a 4%-5% yield, and annual dividend growth of 5%-10% per year, should provide long-term returns that easily eclipse inflation.

Sticking to my dividend growth investment strategy

With that in mind, I’ll be sticking to my long-term investment strategy of acquiring high-quality dividend growth stocks, holding them for the long term, and letting the power of compounding work its magic.

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

More from Edward Sheldon, CFA

Barclays’ dividend is forecast to rise in 2018

Barclays (LON: BARC) (BARC.L) is a popular stock among UK investors, however,...
Read More

Leave a Reply

Your email address will not be published. Required fields are marked *