The Income Investor: a FTSE 100 stock with dividend potential

The near-term outlook for dividend stocks is highly uncertain. Indeed, vastly elevated energy prices caused by conflict in the Middle East are forecast to prompt a higher rate of inflation in the coming months. In fact, while it declined by 50 basis points to a 13-month low of 2.8% in April, inflation is expected to reach around 3.6% by the final quarter of the current year.

This could prompt the Bank of England to raise interest rates, thereby negatively impacting the operating environment of a wide range of sectors. In turn, this may lead to lower profits and constrained dividend growth that could even cause investors to experience a reduction in their spending power amid high inflation.

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Additionally, other geopolitical risks could weigh on the economy’s near-term outlook and put pressure on the prices of income stocks. For example, an ongoing global trade war and heightened political risk in the UK amid a potential change in prime minister, may prompt further elevated stock market volatility over the coming months.

Relatively high yields

Given their uncertain near-term outlook, income investors may naturally wish to pivot away from dividend stocks. And with the FTSE 350 index having risen by 4% since the start of the year so that it now yields just 3.1%, other mainstream income assets may appear to be more attractive.

In fact, some income seekers may feel they can obtain an even greater return than at present on easy-access savings accounts.

Their current return, of course, is surpassed by a wide range of fixed-income assets. For instance, the 10-year gilt yield currently stands at 4.95% after rising by around 50 basis points since the start of the year. And when the relatively low level of volatility and risk of capital loss among gilts, as well as cash savings accounts, are factored in, it is unsurprising that dividend stocks may appear to have limited near-term appeal.

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Long-term prospects

In the long run, though, income stocks could prove to be a worthwhile investment. While inflation is set to rise in the coming months, it is forecast to subsequently moderate in 2027 so that it stands within 10 basis points of the Bank of England’s 2% target by the end of next year.

This could mean that the central bank doesn’t feel the need to react, in terms of making changes to monetary policy, to what could prove to be a temporary spike in inflation. There is even the potential for a resumption of interest rate cuts over the coming years that acts as a positive catalyst on company profitability and dividends, as well as the share prices of FTSE 350 members, via an upbeat economic growth outlook.

Indeed, the economy’s growth rate has always recovered from even its lowest ebb. Therefore, while elevated geopolitical challenges could weigh on its performance and the outlook for dividend growth in the near term, GDP growth is likely to revert to its long-term average over the coming years.

Source: Refinitiv as at 9 June 2026. Bond yields are distribution yields of selected Royal London active bond funds (as at 5-9 June on Trustnet), except the global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 8 June. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (5 June). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 9 June and which exclude bonuses.

Dividend growth potential

While the stock market’s dividend yield is broadly less appealing at present, a whole host of FTSE 350 constituents offer income returns that are comparable to those of other mainstream assets. And with them having potential to deliver inflation-beating dividend growth over the long run, they could provide a far more enticing income return vis-à-vis the fixed nature of bond income returns, plus a potential lack of growth in cash savings returns should heightened inflation and current pause on rate cuts prove to be temporary.

Clearly, the prices of dividend stocks are likely to remain volatile in the short run. But with them offering long-term growth potential in shareholder payouts, the prospect of capital gains plus enticing yields, dividend stocks could still offer income investing appeal.

Income potential

FTSE 100 member Segro (LSE:SGRO) appears to have a relatively favourable risk/reward ratio on a long-term view. The real estate investment trust (REIT), which manages warehouses in the UK and across Europe, currently yields 4.4%.

This is 130 basis points higher than the FTSE 350 index’s present income return, and the company has a strong track record of inflation-beating dividend growth. Indeed, its dividend per share increased at an annualised rate of 8% between 2016 and its latest financial year in 2025. This is significantly higher than the average rate of inflation during that time of 3.4%, which means its investors have enjoyed a sustained increase in their spending power over recent years.

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The trust is expected to deliver further growth in shareholder payouts. Dividends are forecast to rise by 4.5% per annum over the next two financial years as the firm passes on a large proportion of what is expected to be an upbeat earnings outlook. Given inflation forecasts for 2026 and 2027 of 3.6% and 2.1%, respectively, the company’s anticipated dividend growth rate is set to equate to a further real-terms income increase for the firm’s investors.

Near-term challenges

Of course, Segro faces an uncertain near-term outlook. Since three-quarters of its 20 largest customers are logistics companies and retailers, its financial prospects are closely linked to the outlook for consumers.

With inflation expected to move higher in the coming months because of rising energy prices, and further interest rate cuts unlikely near term, cost-of-living challenges may weigh on its operating environment to at least some extent. In fact, real-terms wage growth in the UK stood at 0.8% in the three months to March this year. This compares with a figure of 1.7% in the same three-month period of the previous year.

A margin of safety

The company’s market valuation, though, appears to factor in uncertainty near term. Having fallen by 21% in the past two years versus a 24% rise for the FTSE 350 index, the stock now trades on a price-to-book (PB) ratio of 0.77. This compares favourably with the FTSE 350 index’s PB ratio of 2.2 and suggests there is scope for a substantially higher market valuation. Over time, this could equate to significant capital growth to complement its income investing potential.

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Additionally, Segro’s financial standing indicates that it is well placed to overcome an uncertain period for consumer-focused businesses. For example, it has a loan-to-value (LTV) ratio of 31%, as well as £1.5 billion of total liquidity.

Risk/reward ratio

As a result, the company appears to offer a favourable long-term risk/reward opportunity for income investors. Although its shares could remain volatile amid an uncertain period for consumer stocks - notably retailers and logistics firms which are the main users of its warehouses - the company’s relatively attractive dividend yield, low market valuation and sound financial position suggest it represents a logical income investing opportunity.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor. 

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