Dividends tipped to fall in 2023! A UK income stock I’d buy today

Investing in UK dividend stocks could be the best way for investors to generate strong returns this year. An uncertain economic environment means that securing strong capital can be a tall order.

But investors should tread carefully as not all income stocks will pay good dividends over the next 12 months. Research from Link Group shows that total dividends will decline in 2023.

Dividends to drop

According to Link, UK dividends will increase by 8% in 2022, to £94.3bn. This is due to regular dividend increases.

On an underlying basis – in other words, excluding special dividends – total payouts from UK stocks rose 16.5% to £84.8bn.

However, the financial data firm expects UK dividend rates to fall in 2023 as a gloomy macroeconomic landscape hits corporate profits. Headline dividends will fall by 2.8% year-on-year to £91.7bn, it said.

That said, on an underlying basis, dividends are expected to rise to £86.2bn. But it was only up 1.7%.

Increasing darkness

Ian Stokes, managing director of Corporate Markets UK & Europe at Link Group, said that “The economic sky is decidedly gloomier both in the UK and around the world from this time last year.”

He notes that corporate margins in many industries are under high inflationary pressure and shrinking consumer budgets. And he added that profits are suffering as high interest rates push debt service costs northward.

This factor”will leave less money for dividends and share buybacks in many sectors,” Stokes predicted. Although on the brighter side, he noted that “UK plc entered the recession with profits at a comfortable level compared to dividends and this will provide support.”

Dividend stocks I buy

In today’s environment buying some classic defensive dividend stocks can be a good idea. One of the areas that I like to add to my portfolio when I have money to invest is PRS REIT (LSE: PRSR).

As the name suggests, this UK stock is a real estate investment trust (REIT). This means, in exchange for certain tax advantages must pay 90% of annual profits out by way of dividends. This can make companies like this a great way to generate long-term passive income.

Profits here could suffer if construction costs continue to rise. But I still believe PRS should pay dividends because house rents are increasing.

Property listing business Move right said that the average monthly rent will reach a record high of £1,172 in the last quarter of 2022. This is an increase of 9.7% year-on-year.

This small cap stock has returned an impressive 4.5% for this fiscal year. It could be an excellent stock to buy as the UK enters what could be a deep recession.

Spending on accommodation remains resilient at all points in the economic cycle. Indeed, Rightmove expects rents to rise another 5% in 2023. So earnings (and thus dividends) at PRS should remain insulated from the current downturn.