Avoiding dividend tax can give returns a big boost. But the most important thing is finding the right opportunities.

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.

The FTSE 100

One of the simplest things to do with a Stocks and Shares ISA is buy a fund that aims to track an index. The FTSE 100 is a good example.

Investors can definitely do worse than this – and many will. But there are some things to keep in mind. One is that when stocks go up, they make up more of the index. And that creates a risk with some of the FTSE 100’s more cyclical names.

Shell‘s a good example. Shares have been climbing as a result of conflict in the Middle East creating pressure on global oil supply.

As a result, the company makes up more of the FTSE 100. And someone who invests in the index puts more money into Shell.

The dividend yield however, is lower. And income investors should naturally be less interested in a stock at times like this. That’s a structural limitation of index funds. And it’s why I think the best dividend opportunities are often elsewhere.

Dividend yields

The FTSE 100 has a dividend yield of just over 3%. But there are plenty of individual stocks offering higher starting returns. In several cases, there are clear reasons why. Some face structural challenges and others are hard to assess accurately.

Imperial Brands is an example of the first. The core business is cigarettes and the long-term outlook isn’t positive. Aviva‘s an example of the second. Evaluating the firm’s assets and liabilities is hard even for specialist investors.

Both stocks come with above-average dividend yields. So investors might get their money back before anything goes wrong. For my money though, that’s risky. Especially when I look at what else is available elsewhere.

High dividend yields imply that investors are seeing risks. But the stock market doesn’t always get things right.

Property investing

SERGO‘s (LSE:SGRO) a FTSE 100 real estate investment trust (REIT). At today’s prices, shares come with a 4.6% dividend yield.

The firm owns and leases a portfolio of distribution properties. These include major warehouses as well as last-mile facilities. Demand in this industry is pretty strong and supply is naturally limited by available space. All of that sounds pretty good. 

REITs are often valuable sources of passive income. But mandated dividends often leaves limited scope to retain cash for growth. Segro has a unique way around this. By making use of joint ventures, it can manage entire properties while only putting up half the cash.

Working with partners can create potential conflicts of interest. And that’s a risk that other REITs don’t really have in the same way. When things work well though, it gives SEGRO unique opportunities. And that’s why I think it’s worth considering.

£1,200 a year

The FTSE 100’s 3% yield means investors need £39,603 to earn £1,200 a year in dividends. By contrast, SEGRO’s 4.6% yield cuts this down to £26,086. That’s quite a difference. And while investors shouldn’t just focus on SEGRO, I do think it’s a sign there are opportunities to be found.

The post How much do you need in a Stocks and Shares ISA to target a £1,200 a year passive income? appeared first on The Motley Fool UK.

Several REITs remain in strong financial form and are favourites among some expert analysts in 2026. So for investors seeking to unlock a reliable long-term passive income, which REITs should they be considering right now?

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.

1. Government-backed healthcare income

A top pick from both Berenberg Bank and Jefferies is Primary Health Properties (LSE:PHP). After completing its takeover of Assura in 2025, the REIT’s become the UK’s largest healthcare landlord with a portfolio of 1,142 properties spanning local surgeries, medical centres, private practices, and even a few hospitals.

With healthcare in continuous demand, the company’s had little trouble finding tenants or securing long-term leases.

As such, the average duration of its rental contracts currently spans 11 years, with occupancy standing at 99.1%. And since close to 90% of the group’s rent is paid by the NHS, the company essentially earns government-guaranteed income.

Few REITs enjoy this level of revenue visibility. And as a result, management’s been able to consistently and intelligently allocate capital, ensuring steady growth, and 28 years of continuous dividend hikes – a pattern that experts believe will continue far into the future.

What could possibly go wrong? Having the NHS as a top tenant is a bit of a double-edged sword. While it ensures reliable and timely rent payments, it also means Primary Health Properties is at the mercy of government spending and political priorities.

If the NHS budget’s cut or efficiency initiatives reduce the required real estate footprint for healthcare, the group’s impressive occupancy could come under pressure. Similarly, it gives the NHS far more power when negotiating lease renewals that limit the group’s future cash flow growth.

These risks are something investors will need to consider carefully before adding this business to their income portfolio.

2. Warehousing & logistics income

With e-commerce volumes continuing to expand worldwide, demand for well-positioned logistics facilities continues to rise. And another top REIT from Berenberg to profit from this trend is Segro (LSE:SGRO).

As one of the largest commercial landlords in Europe, businesses such as Amazon, Deutsche Post DHL, and Tesco all rent from Segro to run their expansive operations. And with an impressive undeveloped landbank, this scale advantage is only becoming more prominent.

Occupancy stands at 94.3% with an average lease duration of 8.2 years as of June 2025. And just like Primary Health Properties, this long-term revenue visibility has enabled 11 years of continuous payout hikes.

However, unlike Primary Health Properties, Segro is more exposed to cyclical risks. Downturns in consumer spending directly impact demand for renewing old leases or signing new ones.

At the same time, if the wider market overdevelops new e-commerce capacity prior to a downturn, it could result in oversupply, putting downward pressure on rental rates. Nevertheless, Segro’s demonstrated a knack for navigating such environments in the past.

So once again, it might be a risk worth taking. But these aren’t the only REITs on my radar right now.

The post 2 REITs that could give investors massive, long-term passive income appeared first on The Motley Fool UK.

No, that’s not my approach at all. When I have the opportunity to invest up to £20,000 tax-free in the stock market, I want to plan as soon as I can. And for the coming year, I have my eyes on some property-related investments.

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.

Investors just starting out this year should really look for diversification in their first picks and probably not concentrate on any specific sector. But I’m happy with my current selection, so I think I’m fine to focus a bit.

Why property? Inflation has just blipped up. But the general trend is down, and I can see mortgages getting cheaper in the next year or two. And when inflation falls, retail and other purchasing stands a good chance of getting a boost too. So, commercial real estate investment trusts (REITs), those are what I’m turning my eye towards.

Buy the biggest?

I like the look of the UK’s biggest, Segro (LSE: SGRO), which invests in shopping centres, warehouses, and other industrial and logistics properties. By REIT rules, it has to distribute at least 90% of its taxable income as dividends. And I like that, with a forecast 4.1% dividend yield on the cards.

Segro is also involved in partnerships and joint ventures with others. And that helps rake in extra management fees on top of its own rental incomes. And speaking of rents, in October’s Q3 update the trust reported a 94.3% occupancy rate with “continuing strong like-for-like net rental income growth“.

Segro is moving into data centres too, to capitalise on growing AI demand. I fear that might turn out to be a bit double-edged though, and any slowdown in the AI bandwagon could hurt the stock. But I’m still hoping for some share price growth on top of the dividends.

Buy them all?

To provide a boost to the much-needed Stocks and Shares ISA diversification, I’m also checking out the iShares UK Property UCITS ETF (LSE: IUKP). It’s about the closest thing we have to a REIT index tracker, spreading its shareholders’ cash across a range of individual REITs.

It actually includes some Segro. But Land Securities, LondonMetric Property, and Primary Health Properties are among the 30 or so individual trusts it holds. I like the look of all three of those. They all made my first-pass shortlist for these current ISA considerations.

The expected dividend yield is lower at 3.4% — and dividends are never guaranteed. It’s also open to sharing the risk of any one of its holdings having a bad year.

But as a way to get into real estate investing, especially for Stocks and Shares ISA newcomers, I definitely think it’s a strong one to consider. The broad diversification alone makes iShares UK Property attractive to me.

The post 2 top REITs I’m considering for my 2026 Stocks and Shares ISA appeared first on The Motley Fool UK.

Higher interest rates have hampered sentiment throughout this sector. But that hasn’t stopped all REITs from thriving. And now that rates are steadily falling, 2026 could be the year that REITs make a comeback.

At least, that’s what some institutional investors are signalling with their recent Buy recommendations. And among these are:

• LondonMetric Property (LSE:LMP) – 6.6% yield.
• Segro (LSE:SGRO) – 4.2% yield.

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.

1. Diversified logistics and healthcare

LondonMetric’s a business I’ve had in my SIPP since 2023, generating incrementally higher passive income. While the business has historically specialised in prime-positioned warehouses for e-commerce giants, its recent acquisitions have diversified its real estate portfolio into other sectors like healthcare and entertainment properties.

Today, the group boasts an industry-leading 98.1% occupancy level with an average lease duration of 16.4 years. What’s more, only around 8% of its rental agreements are up for renewal over the next three years, signalling a continuation of steady and predictable cash flows that fund an ever-increasing shareholder payout.

There is, of course, risk.

In the latest Autumn Budget, the government announced higher business rates on larger properties like those in LondonMetric’s portfolio. While it’s ultimately up to tenants to pay this bill, it could put pressure on their margins, indirectly slowing demand for LondonMetric and raising the risk of eventual non-renewals.

Nevertheless, with most of its tenants enterprise-scale customers with solid financials, this is a risk I feel’s worth taking. That’s why I’ve recently topped up my existing position.

2. Investing in European data centres

Like LondonMetric, Segro also manages a vast portfolio of big box warehouses and urban logistic hubs. But more recently, management’s been investing in data centres to capitalise on artificial intelligence (AI) tailwinds.

Only around 8% of its real estate portfolio consists of data centres as of June 2025. But with numerous projects in the pipeline that could quickly change. In the meantime, cash continues to flow into the pocket of shareholders, with occupancy standing strong at 94.3%, funding almost eight years of sequential dividend hikes.

While Segro’s exposed to the same UK business rate threat, its diversification across Europe mitigates the impact, making its yield look more secure. However, it nonetheless remains exposed to potential slowdowns in logistics demand as well as emerging competition within the data centre space.

Its average lease duration is also lower than that of LondonMetric’s, standing at 8.2 years. But that’s not entirely surprising given that lease durations in Europe are typically much shorter than in the UK. Regardless, it remains quite lengthy, providing ample long-term visibility to cash flows.

That’s why I’m taking a closer look at this REIT to potentially sit alongside LondonMetric in my SIPP. But the opportunities within this sector don’t end here…

The post 2 REITs to consider for passive income in 2026 appeared first on The Motley Fool UK.

The 4.2% dividend yield is high enough to be interesting without being spectacular. But the firm’s partnership model sets it apart from other similar dividend stocks.

REITs

REITs are required to distribute 90% of their taxable income to investors as dividends. This makes them attractive passive income investments, but it can limit growth potential.

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.

Cash returned to shareholders obviously can’t be used to buy more properties. So REITs typically have to raise debt, issue shares, or sell existing properties if they want to buy new ones.

There’s nothing inherently wrong with that, but it means doing deals to generate growth is more complicated than it is for other businesses. And that makes it riskier. 

SEGRO has the same structural limitations as other REITs. But it’s been finding some innovative ways to generate portfolio growth while returning its cash to shareholders.

Partnerships

Some of SEGRO’S recent moves have involved joint ventures with partners to boost their portfolio. A good example is the deal the company did last year with Tritax EuroBox.

The FTSE 100 firm acquired six warehouses in a deal worth €470m, but it did this by putting up 50% of the cash in a joint venture. The other half comes from a Canadian pension fund.

Importantly, while SEGRO only owns 50% of the assets, it manages the entire portfolio. That means it collects fees for managing properties without putting up the cash to acquire them.

The company also has a JV focused on building data centres. And this could give it a big advantage over other REITs looking for exposure to a growing industry.

Potential sticking points

The partnership model increases SEGRO’s growth potential. But it can also create potential conflicts that aren’t there for REITs that have wholly-owned portfolios.

One of the most obvious is the possibility of partners disagreeing on what to do. This can create a risk of reduced flexibility and the firm being unable to move quickly.

Another is the potential of one partner needing to sell when the other doesn’t. In this situation, SEGRO might end up with lower returns because of another company’s problems.

There’s also the possibility of the firm having to offer potential opportunities to the Joint Venture rather than being able to keep them for itself. And this is also worth noting.

Growth potential

I think investors looking for passive income should take a close look at SEGRO. The dividend yield isn’t as high as other REITs, but it has some unusually good growth prospects.

When capital is constrained, partnerships can be an attractive way to expand without having to raise extra cash. And this is what makes the stock attractive, in my view.

SEGRO isn’t exclusively a property business – most of its portfolio is owned by itself. But a unique point of differentiation sets it apart from its rivals in a good way.

The post This FTSE 100 dividend stock is hiding a compelling growth story appeared first on The Motley Fool UK.

With this in mind, here are three FTSE 100 dividend shares to consider as dangers to the global economy grow.

SSE

Utilities are among the most secure passive income payers in tough times. Take SSE (LSE:SSE) as an example.

People and businesses don’t suddenly stop using electricity when economic crises come along. Kettles still need boiling, lights turning on and electric cars charging. So these companies’ revenues and cash flows remain broadly stable from year to year, providing the lifeblood for steady dividends.

SSE does have notable debt that investors should consider. But with its net debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) ratio of four times, my view is that its balance sheet is in decent shape.

There is some risk here, in that SSE prioritises wind power above other sources. This creates the danger of poor power generation in calm conditions. But on balance, I think it’s an attractive lifeboat in turbulent times.

The forward dividend yield is a healthy 3.8%.

Alliance Witan

Investment trust Alliance Witan (LSE:ALW) has the strongest dividend growth record on the FTSE 100 index. Shareholder payouts have grown for 58 straight years, through financial system crashes, pandemics, and wars.

This reflects the trust’s diversified portfolio, which spans different regions and industries, including defence sectors like utilities, healthcare, and consumer staples. It’s a quality that reduces risk across the portfolio and helps smooth out dividend volatility.

Alliance Witan’s brilliant dividend stability also reflects its ability to retain earnings during good years. As an investment trust, it’s permitted to hold back up to 15% a year, which it can draw upon for dividends in tougher times.

Its large weighting of global shares leaves it vulnerable to currency risk. But I still believe the trust (which yields 2.3%) is worth serious attention.

Segro

Real estate investment trusts (REITs) can also be rock-solid dividend stocks during market crashes.

Whatever the weather, they must pay 90% of annual earnings from their rental operations to shareholders. That’s in exchange for juicy tax advantages.

Rent collection and occupancy issues can still spring up, though, to impact profits and by extension dividends. But Segro‘s (LSE:SGRO) large and diversified portfolio spanning several European countries and almost 1,400 tenants helps spread the risk.

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.

What’s more, Segro has its tenants locked down on long, multi-year contracts, providing excellent earnings visibility across the economic cycle. It has a weighted average unexpired lease term (WAULT) of 7.1 years to break, and 8.2 years to expiry.

The REIT has raised dividends for the last 11 years on the spin. Its forward dividend yield is 4.7%.

The post Worried about a crash? 3 rock-solid FTSE 100 dividend stocks to consider appeared first on The Motley Fool UK.

Growth

Investors don’t need to scour the FTSE 250 or small cap indexes to discover excellent growth stocks. Games Workshop (LSE:GAW) is a FTSE-listed company with a long track record of spectacular profits growth behind it.

The games manufacturer has a mammoth 2,570% share price rise over the past decade. In my opinion, it has scope for further significant growth, too, though product release timings mean City analysts expect a rare profits drop this year.

The global tabletop gaming market is tipped to surge over the medium-to-long term. Analysts at Fortune Market Insights have predicted annualised growth of 10.6% between now and 2032.

As the market leader in the booming fantasy wargaming segment, Warhammer-maker Games Workshop is in great shape to exploit this opportunity. Encouragingly, it’s branching out with its IP licensing operation to boost interest further, not to mention generate substantial revenues in its own right. A monster TV and film deal has recently been signed with Amazon.

Be mindful, though, that Games Workshop shares trade on a forward price-to-earnings (P/E) ratio north of 28 times. This sort of high valuation might leave the company vulnerable to a price correction if its growth prospects begin to weaken.

Dividends

Real estate investment trust (REIT) Segro (LSE:SGRO) is set up to deliver a large and reliable passive income to investors. Sector rules state at least 90% of average annual rental earnings must be paid out in dividends.

This doesn’t make its dividends bulletproof, though. Earnings can disappoint if economic conditions worsen, weighing on shareholder payouts. Segro’s portfolio is focused on cyclical logistics and industrial sectors.

However, the company’s large and diversified tenant base helps protect it from individual shocks. It has 1,369 different customers spread across eight countries. It also has its tenants locked down on multi-year contracts, providing added security.

For 2025 and 2026, Segro’s dividend yield is a healthy 4.6% and 5%, ahead of the broader FTSE 100 index’s 3.1%.

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.

Value

Standard Chartered (LSE:STAN) has been one of the index’s strongest performers this year, rising 49% in value. Yet, based on expected profits, it still looks a steal to me.

Surging trade in its Asian and African emerging markets means City brokers expect earnings to increase 36% in 2025. This leaves the bank trading on a modest P/E ratio of 10.3 times, alongside a knockdown price-to-earnings growth (PEG) multiple of 0.3.

There are substantial threats to current earnings projections, having said that. Trade tariffs are taking the wind out of China’s export-led economy, a major growth market for StanChart. It also faces intense competition from digital-led challenger banks.

However, it’s my view that such dangers are more than factored into the bank’s low valuation. I’m confident Standard Chartered shares will deliver excellent long-term returns, as rapid population and wealth growth in its territories supercharges the banking sector.

The post 3 great growth, dividend, and value shares from the FTSE 100 index! appeared first on The Motley Fool UK.

The Bank of England recently chose to hold the base rate steady at 4%, but with inflation easing and the economy slowing, most analysts expect further reductions in the next 12 months. That could be good news for a number of dividend-paying stocks that have been under pressure in recent years.

I’ve picked out three British shares I think are worth investors considering in a lower-rate environment.

Segro

Segro‘s (LSE: SGRO) a real estate investment trust (REIT) that specialises in warehouses and industrial logistics, but it’s also making moves into growth areas such as data centres. Some reports suggest global spending on data centres could hit $7trn over the next five years, which would be a major growth driver for the business.

At around 649p, Segro’s share price is down 26.8% in the past year and trades at a big discount to its trailing net asset value (NAV) of 891p per share. Its dividend yield of 4.62% isn’t among the very highest, but it’s been increased for 11 consecutive years and is well-covered by both earnings and cash flow.

For me, that reliability makes Segro a stock investors may want to weigh up. The risk here is that higher financing costs in the commercial property sector could drag on profitability, especially if demand for space doesn’t pick up as quickly as expected.

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.

Diageo

The Diageo (LSE: DGE) share price has had a tough few years, falling 30% since September 2020. At around £17 per share, it’s trading close to a 10-year low. Inflation’s squeezed consumer spending on non-essential goods like alcohol, with many households shifting towards cheaper alternatives.

However, falling interest rates could help bring inflation under control and boost consumer confidence. That in turn may lift spending on premium brands, which is where Diageo excels. Right now, its dividend yield stands at 4.5%, covered by earnings, and while growth was paused this year, the payout has risen at an average annual rate of 5.4% since 2010.

That said, investors should consider the risks. If inflation persists longer than expected, or if emerging markets weaken, Diageo’s recovery could take longer. Still, I think it’s an interesting stock to check out for those seeking reliable dividends in consumer goods.

United Utilities

United Utilities hasn’t been hit too hard compared to other sectors, with shares up 6.8% year to date. But it still stands to benefit from rate reductions as lower borrowing costs would ease the strain on its heavily capital-intensive operations.

Its dividend yield’s 4.62% and it boasts 14 consecutive years of growth. The concern is that the payout ratio sits at 133% and the company holds a lot of debt. If earnings fall any further, there’s a genuine risk of a dividend cut.

Even so, with a forward price-to-earnings growth (PEG) ratio of 0.27, the stock looks attractively valued. Earnings are already up 109% year on year and are expected to continue growing. Even if interest rates remain steady, there’s a strong chance the share price would benefit from this growth.

The post These 3 high-yield dividend shares could benefit from falling UK interest rates appeared first on The Motley Fool UK.

According to McKinsey & Company, by 2030, $7trn will need to be spent globally on building the physical infrastructure necessary to house the servers and other hardware required to run artificial intelligence (AI) applications.

Closer to home, Barbour ABI has found nearly 100 live UK planning applications for such properties. And reflecting their energy intensity, Mordor Intelligence reckons the capacity of domestic data centres will grow from 2,590 MW in 2025 to 4,750 MW by 2030. That’s equivalent to an average annual increase of 12.9%.

The country’s number one

As the UK’s largest real estate investment trust (REIT), Segro already has a significant foothold in the market.

It owns Slough Trading Estate, Europe’s largest business park and home to the continent’s biggest cluster of data centres. It also leases other warehouses to companies operating in the sector. Its tenants include Equinix and Digital Realty Trust, two of the industry’s largest players.

But its share price has disappointed recently — it’s down 28% since August 2024.

And the commercial property market can be volatile.

However, its balance sheet is strong — its loan-to-value was 31% at 30 June. Also, 73% of its lettable area is located in seven countries in continental Europe, which provides it with a certain degree of diversification.

Another option

Tritax Big Box REIT, the UK’s largest owner of logistics facilities, now has two data centres in its portfolio and has announced plans to build a new one near Heathrow airport.

It anticipates spending £200m on similar properties in 2025 and £100m-£200m annually thereafter. It estimates the annual rental yield will be 9%-11%. Not surprisingly, the trust views the sector as one of its key growth drivers.

As part of its expansion plans, Tritax has made an offer to buy Warehouse REIT. If the deal is successful, it will create a combined £7.4bn property portfolio. The takeover target has 409 tenants at 60 sites in England and Scotland. Immediate cost savings of £5.5m a year are expected.

The proposed merger reflects a trend in the investment trust industry where stock market valuations are often lower than the value of the underlying assets.

This apparent lack of appreciation from investors has frustrated directors and shareholders alike. Tritax presently trades at a 28% discount. Warehouse is valued at 11% less than its book value.

Good for income

One of the principal attractions of REITs is that to qualify for certain tax exemptions they must return at least 90% of rental profits to shareholders. This means they usually offer generous yields. For example, based on dividends paid over the past 12 months, Tritax is presently (15 August) offering a return of 5.6%. For comparison, Segro’s is 4.6%.

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.

However, the trust’s dividend could come under pressure if interest rates remain at historically high levels. And possible vacancies remain an ever-present threat.

But like Segro, I think Tritax has exposure to a sector that’s going to see significant growth over the next decade or so. Those that agree with me could consider adding either of them to their portfolios.  

The post These 2 FTSE stocks could benefit from the growth of AI and the demand for new data centres appeared first on The Motley Fool UK.

Even with savings accounts offering some attractive rates, I think income investors should focus on the stock market. Especially shares in companies that return cash to investors as dividends.

Saving and investing

Getting 5% a year creates a strong temptation for investors. With £20,000, there’s the opportunity to leave the money in cash and collect £83 per month in interest.

That situation, however, is unlikely to last forever. It looks as though interest rates are set to fall and cash savings will generate lower returns when this happens.

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.

Given this, one strategy is to hold on to cash while the returns are good and look to move into stocks and shares when interest rates fall. On the face of it, this makes a lot of sense.

Unfortunately, this attractive-looking plan has a fundamental flaw. It fails to account for the fact that dividend stocks are also sensitive to changes in interest rates.

The stock market

When interest rates fall, share prices generally go higher. That’s because lower returns from cash and bonds make equities more attractive, causing investors to buy. 

The trouble is, higher share prices mean lower dividend yields. So anyone looking at – for example – Segro (LSE:SGRO) with a 4.75% yield today might well find it isn’t there when interest rates fall.

In general, low interest rates can be very positive for businesses. And it’s especially true for real estate investment trusts (REITs) like Segro. 

REITs can’t retain their earnings, meaning they have to either take on debt or issue equity to grow. And falling interest rates mean borrowing costs are lower, creating more opportunities.

Warehouses

Segro owns a portfolio of warehouses and industrial distribution facilities. It leases these to tenants and distributes the income to shareholders as dividends. 

The risk with this type of business is the potential for oversupply. The rise of e-commerce has led to a boom in warehouse-building in the UK and that’s generally not a good thing for rents.

Segro, however, focuses on properties in locations near major cities and transport hubs. Space in these areas is limited and this typically means strong demand. 

Around 95% of the firm’s portfolio is currently occupied. And the company has consistently managed to increase its dividend over time.

Buying shares

Income investors have a choice – they always do. Cash currently generates a 5% return with almost no risk of capital loss, but that return is likely to go down if interest rates fall. 

At the same time, shares in companies like Segro offer a 4.75% dividend yield. And that return looks set to increase if the firm keeps returning more cash to shareholders. 

If investors wait for interest rates to fall, though, they might well find themselves faced with lower starting yields. So I think the right strategy is to consider buying stocks like Segro before this happens.

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