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Why FTSE 100 dividend stocks could be the big winners in 2018

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So far in 2018, the FTSE 100 has delivered a disappointing performance. It has been down by as much as 10% at times, which is halfway towards bear market territory. This shows just how volatile the index can be. It also provides evidence of how quickly investor sentiment can change.

As such, investing in relatively reliable income stocks could be a shrewd move this year. With volatility set to remain high as Brexit talks continue and interest rate rises set to take place, companies offering an inflation-beating income could be the top performers over the coming months.

Brexit uncertainty

While there has been progress in Brexit talks in recent months, the fact remains that a deal has not yet been done. Moreover, there seems to be a number of areas where the UK and the EU are a very long way apart in terms of their viewpoints. Compromise may be possible, but it could be a painful and uncertain process of arriving there.

In the meantime, the prospects for a lack of a deal could increase as the March 2019 deadline approaches. As such, the volatility which has been present in share prices in recent months could continue. This may mean that the pound weakens and inflation resumes its upward trend after a recent pullback. As a result, companies that are able to offer inflation-beating yields alongside strong track records of resilient growth could become more in demand among investors.

Interest rate rises

Interest rates in the UK are expected to rise over the next few months. This could place downward pressure on the FTSE 100’s price level, with interest-producing assets becoming more attractive relative to shares than they have been in the past.

In addition, the world economy now faces a period of higher inflation. The deflationary forces of the last decade seem to be fading away. With the US in particular adopting taxation and spending policies which could encourage inflation, interest rate rises across the globe seem almost inevitable. This could cause investor sentiment to weaken and make other assets more enticing. It may also lead to a gradual slowing in the rate of economic growth, which would clearly be bad news for a range of companies.

As such, stocks which are considered defensive rather than cyclical could enjoy greater demand from investors. They may provide a less volatile shareholder experience, while also helping to shield their investors from the potential dips in the index’s level.

Outlook

While the FTSE 100 may experience a volatile period, there are still opportunities for investors to benefit. Buying on dips can be a successful strategy in the long run and may provide investors with wider margins of safety. However, stocks which offer high and dependable yields alongside solid business models could be the real winners this year. They may help to support the FTSE 100’s price level in what could prove to be a risky year for investors.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.