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After all the volatility of the past year, many dividend stocks are now offering impressive returns. As such, income investors have countless opportunities to generate more substantial long-term passive income. And after the recent turmoil in the banking sector, even more high-quality income stocks are trading at reduced prices.
However, despite all the market pessimism, time may be running out to capitalize on the situation, especially since the Office of Budgetary Responsibility (OBR) has released bullish forecasts.
Ensuring high yields
Finance Minister Jeremy Hunt revealed this month’s spring budget. And during his speech, he announced that the OBR has predicted that the UK no longer enter recession. To top it off, the forecast also expects inflation to drop to just 2.9% by the end of the year. That’s a big improvement compared to the current level of 10.1%.
As encouraging as this news is, it indicates that income investors are on the clock to find the best dividend stocks to buy. But while the returns may be high, not all of these seemingly large payouts will be sustainable.
With emotions running high, even blue chip stocks are selling in a panic. This creates opportunities for stock pickers. However, simply buying random companies that have fallen out of favor is not likely to generate positive returns. In fact, implementing this strategy will likely destroy wealth rather than create it.
Instead, the goal is to determine if the shares have been sold unreasonably or if there is a fundamental flaw. For example, a balance sheet riddled with variable rate debt could add considerable pressure on profit margins in a higher interest rate environment. Similarly, cash flows that are disrupted by competitors in better shape could compromise dividends.
Investors should research each business to verify that today’s high returns can be sustained in the future. Or, better yet, explore whether the company can increase dividends in the future.
Don’t panic, buy
Since many investors are busy with panic selling, it is critical not to fall into the panic buying trap. The clock may be ticking, but hasty analysis fueled by fear of missing out is just as bad investment practice. It’s also worth noting that investors may have more time than the OBR predicts.
Forecasts should always be taken with a grain of salt, especially when dealing with something as complex as the UK economy. There are also mixed opinions to consider.
On the one hand, the OBR expects the UK economy to return to pre-pandemic levels by 2024. By contrast, the Bank of England (BoE) is much less optimistic, anticipating it will take until 2026.
So which forecast is correct? That’s anyone’s best guess right now. But investors can still capitalize on today’s deals while guarding against the possibility of a prolonged rally. A strategy as simple as buying dividend stocks consistently over time could do the trick.
Instead of investing all their money in one large lump sum, income investors can capitalize on high returns today while retaining capital for months to come. That way, if the BoE’s more bearish view ends up being more accurate, investors can buy more top-tier dividend stocks at potentially even better prices.
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