UK dividend stocks could look even more tempting if the Bank of England cuts rates this week!

I’ve loaded up on FTSE 100 dividend stocks over the last two or three years, and haven’t regretted it for a moment. Now I think events this could make them look even more tempting than they already are.

As well as dividend income, I’ve been getting bags of growth too. Shares in one of my favourites, Lloyds Banking Group, are up 70% in the last year and 105% over two. As a result, the yield’s fallen to 3.35%, but that should recover, and I’m also collecting stellar rates of income elsewhere.

High-income FTSE 100 shares

One of my favourites is wealth manager M&G. It was yielding more than 10% when I added it to my Self-Invested Personal Pension (SIPP) in 2023. That has since dipped to 7.25% today on a trailing basis, but that’s caused by a 37% rise in the share price over the last year, which I’m certainly not going to complain about. I get an even bigger trailing yield of 7.8% from insurer Phoenix Group Holdings, whose shares are up 30% in a year, turbo-charging my total return.

Some of the yields I’m collecting are more than double what savers can expect from a standard deposit account. Legal & General Group throws off 8.7% while FTSE 250-listed Taylor Wimpey pays 9.4%. Their shares haven’t done so well, but I’m hoping that will reverse next year.

Markets reckons there’s a 92% chance the Bank of England will cut the base rate at its next meeting on Thursday (18 December), most likely from 4% to 3.75%. That’s bad news for savers, because returns on variable rate accounts will fall as a result, but it’s good news for FTSE income stocks, as their yields will look even more attractive by comparison.

BP shares are rewarding

My SIPP also contains oil giant BP (LSE: BP). While not the highest yielder on the FTSE 100, it still pays a generous 5.56%. The BP share price has been volatile, climbing 10% over the last year but down 5% over two. Nothing’s guaranteed when investing, neither dividends nor share price growth. But over the long term, history shows that equities deliver far superior total returns to cash or bonds. Ultimately, volatility is the investor’s friend.

An interest rate cut on Thursday will hit savings rates but won’t have any impact on yields. In the longer run, it could boost dividends, as cheaper borrowing and a revived economy lift company profits.

There are other rewards to holding stocks. BP has also supported its share price through regular share buybacks. Yet I’m not sure this is the first dividend stock I’d consider buying right now. The BP share price could be in for a volatile time, amid talk of an oil gut. If crude prices fall further, so could BP’s profits.

Climate change also poses a risk, as the drive to renewables could knock oil demand, hitting an old-school fossil fuel producer like this one. However, there are plenty more high-yielding dividend stocks on the FTSE 100. And the lower interest rates go, the more attractive their yields will appear.

The post UK dividend stocks could look even more tempting if the Bank of England cuts rates this week! appeared first on The Motley Fool UK.

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Harvey Jones has positions in Bp P.l.c., Legal & General Group Plc, Lloyds Banking Group Plc, M&g Plc, Phoenix Group Plc, and Taylor Wimpey Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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