Why I’m betting on dividend stocks to boost retirement income

I think dividend stocks could be appealing despite the prospect of increasing global interest rates.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the world economy having experienced a decade of loose monetary policy, it appears as though changes could be ahead. Clearly, an ultra-low interest rate will not last in perpetuity, so it is a matter of when, not if, an increasingly hawkish monetary policy will come into effect.

A rising interest rate may, of course, have a negative impact on the stock market. In particular, it could hurt the appeal of dividend stocks. While this may be a concern, income-producing companies could still offer an impressive return for individuals seeking to boost their retirement income.

Increasing interest rates

Higher global interest rates could have a negative impact on the performance of the world economy. The US interest rate, for example, is expected to rise during the course of 2019. This could cause challenges for countries which have dollar-denominated debt, since the interest they are paying may increase. They may also be impacted by a stronger dollar, since a higher interest rate can cause a currency to strengthen. This may make it more costly for them to repay debt, and could hold back their economic performance.

A rising global interest rate may also hurt the performance of the stock market. As well as potentially lower earnings growth from a slowing world economy, other assets such as cash and bonds could become increasingly attractive relative to stocks. This is especially relevant for dividend stocks, since the difference in income return that they offer versus lower-risk assets may be reduced. This could mean that investors do not feel they are worthy of their current risk premium, which may cause deteriorating performance over a sustained time period.

Income appeal

However, in many cases dividend stocks have low valuations at the present time. Their high yields suggest that investors have, in many cases, factored in the potential risks posed by rising interest rates. This could mean that they are more resilient, and offer more favourable risk/reward opportunities, compared to cash and bonds.

Furthermore, the pace of interest rate rises is set to be relatively slow. The US, for example, is being very wary about how quickly it tightens monetary policy, since there is a danger that it chokes off its own economic performance. As such, dividend stocks could continue to offer income appeal – especially with global risks such as a slowing China and increasing protectionism causing valuations to be somewhat lower than they may otherwise have been.

Volatility

While dividend stocks could experience a period of heightened volatility as interest rates rise, for a retiree who is focused on income this is unlikely to be a cause for concern. By investing in a variety of companies that have strong balance sheets and resilient cash flow, it may be possible to generate an impressive level of income return over a sustained period of time. Even if valuations disappoint in the short term, they are likely to recover in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »