While interest rate rises are on the horizon, the reality is that the UK’s interest rate is unlikely to be back to normal levels by 2020. Policymakers remain cautious regarding the potential for deflation, with the Chinese slowdown reminding rate setters of the dangers of a deflationary period that could hurt the UK and other economies around the world.
Furthermore, the Bank of England has stated repeatedly that interest rate rises will be slow and steady. So even if they do rise over the coming years, they’re likely to be deliberately slow with the aim of causing minimal shocks to businesses and investors. Therefore, dividends should stay popular for a number of years since the returns from other assets remain relatively low.
This one will run and run
One stock that offers a superb yield is SSE (LSE: SSE), with it currently standing at a whopping 6.1%. This places SSE among the upper echelons of the FTSE 100 when it comes to dividend yield and best of all for the utility company’s investors is the outlook for shareholder payouts. They’re due to rise by 1.6% next year, which is likely to provide a real-term rise in dividends due to the low inflation rate set to remain in play during the next year.
A rising interest rate is likely to hurt investor sentiment towards highly indebted companies such as SSE as it means the cost of borrowing will rise. But the company’s income appeal should counteract this and lead to strong share price gains. With SSE’s shares trading on a price-to-earnings (P/E) ratio of just 13, there’s upward rerating potential and they look set to continue a run that has seen them rising 45% in the last 10 years.
Income appeal
Also offering superb income appeal is Berkeley Group (LSE: BKG), with the housebuilder recently enhancing its dividend return programme by aiming to pay out an additional £0.5bn in the coming years. So following the £4.34 that has already been paid, £12 per share (or £2 per annum) is expected to be paid between 2016 and September 2021.
With the company’s shares trading at £35.16 each at the time of writing, this works out as an annual dividend yield of around 5.7%. While appealing, there’s scope for further dividends to be paid since Berkeley is performing relatively well and should enjoy buoyant trading conditions in the coming years. And with its shares trading on a forward P/E ratio of just 9.3, there’s scope for vast capital gains from an upward rerating, too.
Long-term strength
Meanwhile, Shell (LSE: RDSB) remains a top-notch income stock. It’s enduring a highly challenging outlook with the oil price showing little sign of ending its prolonged decline so a dividend cut could be on the cards. But this is unlikely to dent Shell’s long-term income appeal since the market already appears to be pricing-in such a cut, with Shell having a current yield of 9%.
Furthermore, Shell is seeking to take advantage of current low prices in the oil and gas industry by increasing its market share. With a modestly leveraged balance sheet and strong cash flow it has the potential to take on debt and build a stronger business in the long run through acquisitions. And with Shell forecast to return to positive earnings growth this year, its P/E ratio of 10.7 could start to rise, especially if the oil price begins to stabilise over the medium term.