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With interest rates at 4.5%, there are a lot of opportunities for investors looking to earn passive income. But that could be set to change in the next month.
The Bank of England is widely expected to cut interest rates in May and, if this happens, things could suddenly look quite different. So right now could be a good time to consider buying.
Interest rates
At the last meeting, the members of the Bank of England’s Monetary Policy Committee (MPC) voted 8-1 in favour of holding interest rates at 4.5%. But a lot has changed since then.
Most obviously, inflation has fallen from 3% to 2.6%. The risk with cutting rates is the potential for inflation, but the slowing rate of price increases helps limit this threat.
On the other hand, GDP forecasts have been falling. And the positive side of cutting interest rates is that it might help boost economic growth.
The ongoing tariff situation in the US creates some uncertainty, but there are clear reasons to expect an interest rate cut in May. And this could be significant for passive income investors.
Investment returns
Right now, investors have quite a few opportunities when it comes to passive income. Even savings accounts are currently offering interest rates above 4%.
The trouble is, this is likely to change if interest rates fall. And that typically means investors look to other assets – including stocks – leading to higher prices and lower dividend yields.
As an example, shares in Associated British Foods (LSE:ABF) currently have a 4% dividend yield. But this could well come down if falling interest rates lead to a rise in the share price.
Investors who buy the stock today, though, don’t need to worry about this. They stand to keep getting a 4% return indefinitely – as long as ABF keeps paying its current dividend.
UK retail
The big question for investors is whether or not the firm can keep paying that dividend. Like a lot of UK retailers, results have been disappointing lately due to weak consumer sentiment.
ABF’s largest division is Primark, but sales at the discount retailer have been falling on a like-for-like basis. If this continues for long enough, it could become a problem for investors.
In the short term, though, the company has scope to offset this somewhat by opening more outlets. It’s aiming to increase its store count by 16% over the next couple of years.
Primark also has a strong brand and reputation, which should help it be more resilient as it grows. Retail is a tough industry, but I think the business has a strong competitive position.
Durable dividends
Shares in Associated British Foods have fallen almost 20% over the last year. But I think there are clear reasons to believe the stock won’t hang around at these prices forever.
One is the fact consumer sentiment has been unusually low recently. I don’t know exactly when that might change, but I see this as a temporary challenge.
The other is the outlook for interest rates. If rates fall, the stock could well climb, which is why investors looking for passive income might think about buying it today.
