The current Bank of England base interest rate sits at 2.25% but it is set to soar
There are two UK dividend shares on my radar at the moment. With £1,000 to invest, I’d invest £500 in each.
The stocks are Howden Joinery Group (LSE:HWDN) and Forterra (LSE:FORT). Each has a solid balance sheet, a price-to-earnings (P/E) ratio under 10, and a dividend yield around 4%.
Furthermore, I think that both stocks have an economic tailwind behind them. Rising interest rates are, I think, likely to help both businesses.
Interest rates in the UK have been rising sharply lately. The Bank of England base rate is now 2.25%, having been at 0.1% a year ago.
Mortgage rates have been increasing as interest rates in general rise. The average interest rate on a two-year fixed mortgage is now 6%, up from 1.2% a year ago.
Taking out a new mortgage to buy a bigger house is therefore more expensive than it was. As a result, demand for mortgages has fallen and the UK housing market has been slowing down.
I think that higher mortgage rates will lead to more people choosing to spend money improving their existing houses. In my view, this could be positive for both Howden’s and Forterra.
One way of improving an existing house is by installing a new kitchen. That’s where Howden Joinery Group comes in.
Howden’s supplies kitchen appliances, materials, and fixtures to the building trade. So I think that it stands to do well if there’s an increase in demand for kitchen improvements.
Compared to the cost of moving, the cost of improving a kitchen is relatively low. This is especially true while mortgage rates are high.
One of the challenges that the business has to contend with is inflation. Higher prices for raw materials are likely to increase the company’s costs.
As I see it, though, the inflationary headwind is subsiding somewhat for Howden’s. The price of lumber, steel, aluminium, and copper are all lower than they were a year ago.
That’s why I think that Howden’s can do well in the current environment. As higher interest rates in the UK might drive demand for their products, I’d happily buy the shares today.
Another way to improve an existing house is by building an extension. This is Forterra’s line of business.
Compared to installing a new kitchen, building an extension is expensive. But for people looking for more space, it’s still likely to be cheaper than moving house.
Forterra’s main product is bricks. One of the downsides for this company is that slowing demand for houses might mean slowing demand for bricks as new building work slows down.
But I don’t think that this is a big problem. Forterra owns the London Brick Company, which the company estimates is used in around 25% of UK housing stock.
This is significant. For someone looking to build an extension, it’s important to have bricks that match the ones used in the existing structure.
As such, I expect Forterra to benefit from an increase in demand for extensions. And I’d be willing to invest £500 into the stock today as a result.
The post How I’d invest £1,000 in UK dividend shares right now to start generating passive income appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. 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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