I think there’s a rare opportunity to build wealth by buying income shares right now. And I’m not talking about the fact that Meta Platforms is now technically a dividend stock.
With interest rates at their highest levels for a decade, bonds are catching the attention of investors looking for solid returns. But to my mind, this is the moment to seize the day in the stock market.
Higher yields
Take Unilever (LSE:ULVR) as an example. The stock has fallen by about 25% since September 2019, but this has almost nothing to do with the underlying business.
Revenue growth has been unspectacular and inflation has been cutting into margins. These are ongoing risks, but Unilever remains a global success story and has increased its dividend per share by almost 10% since 2019.
The company has a new strategy for growth involving doubling down on its best-performing brands, which I think is a good move. But the real attraction at the moment is the price.
The dividend yield on Unilever shares has gone from 2.7% in 2019 to 4% today. On a £10,000 investment, that’s a difference of £1,300 over 10 years, even without the benefit of compounding.
Interest rates
The main reason Unilever shares have been falling, in my view, is the rise in interest rates. Since September 2019, the yield on a 10-year UK Government bond has gone from 0.39% to 3.9%.
A 2.7% dividend from a stock like Unilever might have been attractive in 2019. But with 3.9% on offer from a gilt, it’s difficult to make sense of buying the stock at 2019 prices today.
Unilever shares have therefore been falling, despite the dividend rising consistently. The dividend yield is now close to 4%, which is more attractive against a bond offering 3.9%.
I’m not expecting huge growth from Unilever’s dividend going forward. But I’m anticipating steady increases and I think that right now might be a great time to consider buying the stock.
A once-in-a-decade opportunity
The Bank of England currently has interest rates at their highest levels for over a decade, pushing dividend yields upwards. But it looks like interest rates are unlikely to go higher from here.
Only two of the nine members of the Monetary Policy Committee voted in favour of further increases last week. And the markets are expecting the next move to be lower.
If this happens, then the forces that have been pushing dividend yields up are likely to reverse. I’d expect share prices to go up and dividend yields to come down.
In a situation where interest rates are coming down, I wouldn’t expect to see Unilever shares on sale with a 4% dividend. That’s why I think the current interest rate level might be the best opportunity.
Building wealth
I’m not normally a huge fan of buying dividend stocks for building wealth. I usually think of them as passive income investments.
Right now though, I’m prepared to make an exception. Yields are high enough that I think investors can generate meaningful wealth through compounding.
But it’s impossible to know with certainty how long this will remain the case. So I’m looking to make the most of the opportunity in income stocks before it goes away.
