With the new financial year under way, I’ve been looking for stocks to buy. And I’ve got things moving with a pair of dividend shares look like a bargain to me.
Neither is a UK stock, which is unusual for me. But a delay to interest rate cuts across the Atlantic has created some opportunities in companies that look set to increase their dividends over time.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
US stocks
US stocks have been falling lately following some worrying macroeconomic news. Specifically, the latest data indicates that the rate of inflation has crept back up to 3.5% from 3.2%.
By itself, I don’t think this is a huge issue – I’d expect businesses to be able to cope with 3.5% inflation. The issue though, is that it means interest rates are likely to stay higher for longer.
The US central bank has said it plans to start bringing down rates when inflation reaches 2%. And there had been some optimism this might be happening in the next couple of months.
To some extent, the level of the S&P 500 was already reflecting this. So news of rising inflation – which makes imminent rate cuts less likely – has been causing US share prices to fall.
Pfizer
Shares in Pfizer (NYSE:PFE) are down 37% from their 52-week high as Covid-19-related product demand faltered. I think the outlook for the business is much better than the market is giving it credit for though.
A return to the $6.58 in earnings per share the company reported in 2022 looks unlikely, but a $26 share price clearly reflects this. Analysts are forecasting $2.22 for this year, rising to $3.01 in 2026.
There’s no question the stock’s a risky investment – drug development is expensive and returns are uncertain. And attempting to grow through acquisition comes with a danger of overpaying.
but at $26, I think the stock’s become too cheap to ignore. If the company manages to keep increasing its dividend, I’ll get a very good return over time by buying at today’s prices.
Realty Income
Realty Income (NYSE:O) is a real estate investment trust (REIT) with an enviable track record of dividend growth. But the stock’s 20% off its highs, due to one of its largest tenants closing stores.
By itself, I don’t think this is a big problem – Realty Income’s diversified portfolio means the effect is likely to be somewhat limited. The issue comes with the possibility of more widespread closures.
That’s a genuine concern. But with no company making up more than 3.8% of Realty Income’s total rent and the average tenancy having 10 years until expiry, I don’t see any imminent danger here.
As a result, I’ve been buying the stock for my Stocks and Shares ISA. Future growth might be slow and steady, but this is a chance to buy the stock at an unusually low price, so I’m looking to take advantage.
Dividend taxes
For UK investors, there’s an obvious disadvantage to investing in US dividend shares. Distributions are taxed at 30% (reduced to 15% with a W-8BEN form), rather than zero in a Stocks and Shares ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
That’s not something to ignore. But even with this in mind, I think the opportunities in Pfizer and Realty Income are just too cheap to miss at the moment.
