Some of the best dividend stocks on the FTSE 100 and FTSE 250 are trading at considerable discounts. There are several reasons for this, the recent interest rate hike is among them.
So amid this environment, I’m channeling my inner Warren Buffett. The legendary investor famously said that “bad news was an investor’s best friend” as it allows us to buy more of the stocks we believe in at knockdown prices.
Investing like Buffett
Buffett once made a $1.3bn investment in American Express when the company was facing an expensive lawsuit. That same investment now returns $300m in dividends every year.
A company in a similar position today is GSK (LSE:GSK). The pharma giant has been trading at a discount for some time over the litigation regarding the now-discontinued heartburn drug ranitidine, or Zantac.
The pressure on the stock was released partially last month when GSK reached a confidential settlement with one plaintiff James Goetz — the court case has been dismissed and GSK insists it has no liabilities.
Uncertainty around the lawsuits brought against GSK has been reduced, and the markets hate uncertainly. It could still be expensive, but a protracted and costly lawsuit has been avoided. The company still faces more than 5,000 similar lawsuits in California and close to 73,000 in Delaware.
It could be a good time to pick up GSK stock and its swollen 4.4% dividend yield. That’s what I’ve been doing.
Bad times won’t last
The outlook for the next few quarters looks uncertain for Lloyds. Yes, higher interest rates also mean higher net interest income, but with the Bank of England rate at 5%, we’re likely to see an increasing number of Britons default on their debts. For banks, this means higher impairment charges. As a result, the recent strong performance could be coming to an end.
But it won’t last forever. I’m expecting a few tough quarters for the UK’s most interest rate-sensitive bank. But in the medium term, we’re likely to see interest rates fall between 2% and 3%, something of a sweet spot for lenders. I’ve been topping up as the share price has pushed downwards. The yield now sits at 5.6%.
Investing for the future
The renewables sector has fallen out of favour with investors this year. And that’s reflected in the declining share price of Greencoat UK Wind (LSE:UKW). Falling energy prices have also contributed to this.
As the name suggests, the company invested in British wind energy. Greencoat has 45 wind farm investments across England, Scotland, Wales and Northern Ireland with an aggregate net capacity of 1,289.8 megawatts.
While the stock might not regain favour with investors for some time, I believe now’s a good time to top up and lock in the 5.5% dividend yield. After all, the long-term prospects are very strong here. Wind energy is the cheapest to produce in the UK, and it’s mostly abundant.
The company also looks to increase the dividend in line with inflation.
