Investing in UK dividend stocks might be the best way for investors to make a solid return this year. An uncertain economic environment means that achieving robust capital generation could be a tall order.
But investors need to tread carefully as not all income shares will pay handsome dividends over the next 12 months. Research from Link Group suggests that total dividends will fall in 2023.
Dividends to drop
According to Link, UK dividends increased 8% in 2022, to £94.3bn. This was thanks to a strong rise in ordinary dividends.
On an underlying basis — in other words, excluding special dividends — total payouts from British stocks soared 16.5% to £84.8bn.
However, the financial data firm expects UK dividend levels to drop in 2023 as the bleak macroeconomic landscape hits corporate profits. Headline dividends are tipped to decline 2.8% year on year to £91.7bn, it says.
That said, on an underlying basis, dividends are expected to rise to £86.2bn. Yet that’s up only 1.7%.
Increased gloom
Ian Stokes, managing director of Corporate Markets UK & Europe at Link Group, says that “the economic skies are decidedly gloomier both in the UK and around the world than this time last year.”
He notes that company margins in most industries are under the strain of high inflation and reduced consumer budgets. And he adds that profits are suffering as high interest rates push debt-servicing costs northwards.
These factors “will leave less money for dividends and share buybacks in many sectors,” Stokes predicts. Though on the brighter side, he notes that “UK plc enters the recession with profits at a comfortable level compared to dividends and this will provide support.”
A dividend stock I’d buy
In the current environment buying some classic defensive dividend stocks could be a good idea. One such share I’m considering adding to my portfolio when I have spare cash to invest is The PRS REIT (LSE:PRSR).
As its name implies, this UK stock is a real estate investment trust (REIT). This means that, in exchange for certain tax advantages it has to pay 90% of annual profits out by way of dividends. This can make firms like this a great way to generate long-term passive income.
Profits here could suffer if construction costs continue to rise. But I still believe PRS should pay dividends as residential rents surge.
Property listings business Rightmove says that average monthly rents hit record highs of £1,172 in the final quarter of 2022. This was up 9.7% year on year.
This small-cap stock yields an impressive 4.5% for this fiscal year. It could be a particularly good stock to buy as the UK enters what could be a deep recession.
Spending on accommodation remains resilient at all points of the economic cycle. Indeed, Rightmove expects rents to rise another 5% in 2023. So earnings (and thus dividends) at PRS should remain insulated from the current downturn.
