While a number of investors cheered when interest rates rose in November for the first time in a decade, the prospect of a return to ‘normal’ interest rates still seems distant. Over the next two years, the market is anticipating UK interest rates to rise to just 2%, with the increase clearly highly dependent upon how Brexit progresses.
Therefore, while bad news for savers, the reality is that the next few years could be very similar to the last decade from an income investing perspective. Loose monetary policy could mean that real returns on cash are negative. As a result, here are two income stocks that could remain highly appealing over the medium term.
Justifying a higher interest rate
Although Mark Carney has been described as being akin to an ‘unreliable boyfriend’ in terms of the inability of the Monetary Policy Committee (MPC) to deliver clarity on the prospects of a rise in interest rates, the justification for tightening monetary policy does not seem to be strong.
Inflation has fallen back of late, and so there is a reduced requirement to attempt to cool the performance of the UK economy. And with Brexit negotiations still providing a significant amount of uncertainty, maintaining a looser monetary policy stance could be beneficial to the performance of the UK economy over the medium term.
Therefore, even though a 2% interest rate is expected by the market in 2020, it would not be a huge surprise for it to miss this estimate. Interest rate rises have been anticipated in the last few years, and at the moment, it seems plausible that a trend of delaying them could be ahead.
One solution to the challenge of obtaining a real income return for many investors has been dividend stocks. Due to the potential for low interest rates in the next couple of years, companies such as easyJet (LON:EZJ) and Royal Mail (LON:RMG) could remain of significant interest to income investors.
Neither company is without risk, of course. easyJet faces the threat of rising fuel costs as well as a continued high level of competition in the industry. Meanwhile, Royal Mail’s UK performance continues to be mixed, with its Letters segment in particular experiencing sustained volume declines in recent periods.
However, the two stocks appear to offer relatively attractive income potential. easyJet is due to yield 3% this year, with this figure expected to rise to 3.8% next year due to a forecast rise in dividends per share of 25%. The company is enjoying a significant amount of success from a refreshed strategy that has seen passenger growth improve in recent quarters.
Royal Mail, meanwhile, is expected to yield 5% this year from a dividend that is due to be covered by 1.65x earnings. Its international growth prospects could help to offset the challenges faced in its UK division, while a continued focus on cost avoidance may also help to boost its dividend growth potential.
As a result, its income appeal alongside easyJet may remain high given the potential for interest rates to remain at a relatively low level.
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