Passive income is the holy grail for many investors. Personally, I invest in dividend stocks with the aim of re-investing the income I receive. In the future, when my pot is bigger, I can start drawing a second income.
But in the near term, I need to be picking the best dividend stocks for my portfolio in an ever-changing environment.
This week, there was an upside shock with regards to UK inflation. On Wednesday, it was announced that inflation fell to 10.1% in the year to March from 10.4% in February — this was above estimates.
In response, there was a significant re-rating in terms of central rate expectations. Many traders are now expecting Bank of England rates to push up to and above 5%.
So, is there a company that could benefit from this environment? I think so.
Interest income
The more interest rates rise, the more income Hargreaves Lansdown can generate on customer deposits. Ongoing revenue — generating over 80% of total revenue — came in at £293m in the six months to 31 December, up from £201m a year previous.
Ongoing revenue is primarily composed of platform fees on funds and equities, fund management fees, net interest income, and ongoing advisory fees. Net interest income is an increasingly important part of this revenue makeup.
From 31 December 2021 to 31 December 2022, net interest earned on cash skyrocketed 976% to £121.6m.
Going forward, with interest rates poised to rise further in the short term, the Bristol-based firm could receive £200m-£250m throughout the year as a result of higher interest rates.
Hargreaves said its Active Savings unit had £1.7bn pounds in cash flows in the six months to December 31, compared with £600m pounds in the same period last year. The firm highlighted that Britons were looking to boost their returns.
I will caveat this by noting I expect interest rates to peak this year and start falling in the second half. Having said that, I don’t think that’s necessarily a bad thing. It’s particularly convenient that Hargreaves receives a boost from net interest income during the cost-of-living crisis — during which investment activity is likely to be lower.
Hargreaves for the long run
Amid a worsening macroeconomic environment, Hargreaves reported 17,000 net new clients in the last reported quarter, taking the total to 1,754,000 active clients.
Growth is positive but new client numbers are slowing. As Britons face increasing pressure from inflation, it’s perhaps unsurprising to see business slow.
That’s not a big issue in the short run as net interest revenues are soaring. But in the long run, we want to see more clients and more trading activity.
In the long run, I’m expecting Hargreaves to benefit from an increasing number of Britons looking to take control over their own finances. It is the UK’s no. 1 investment platform and for good reason — in my opinion.
There are concerns. The main one being cheaper competitors. I’m expecting to see Hargreaves drop some of its fees and focus on generating income from customer deposits, like US peer Charles Schwab.
Still, I think Hargreaves is a great business with strong margins. I’m a big fan of its growth potential but also its 5.1% dividend yield. And in the high interest rate environment, I think it’s a great buy. I’ve recently topped up.
