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I think 2026 could be a huge year for dividend shares. There are no guarantees, but interest rates are expected to fall, which means that the time to think about buying could be right now.
If interest rates do go lower, investors who own dividend stocks are likely to keep their passive income while seeing their investments go up. Those in cash, however, are set to miss out.
Inflation and interest rates
In December 2025, the Bank of England cut interest rates to 3.75%. And economists seem to think there’s a decent chance there’s more of the same coming in 2026.
The macroeconomic environment does look like it supports this. GDP growth has been faltering and cutting interest rates to reduce borrowing costs is one way to try and boost this.
One of the main reasons to avoid doing this is usually that there’s a risk of inflation. But the rate of price increases in the UK has been slowing recently, which also supports lower rates.
As a result, the forecast is for interest rates to reach 3.25% by the end of the year. And while that might not sound like a big change, it could be significant for dividend stocks.
Savings and dividend stocks
As the Bank of England cuts interest rates, savers can expect to see the returns they get from their accounts decrease. But this isn’t the case with dividend shares.
Investors who buy shares in a company get their share of any future dividends coming from the business (unless they sell). And this could be valuable if interest rates fall.
As an example, consider Admiral (LSE:ADM). The company currently returns £2.36 per share in dividends to investors, which is a 7.5% dividend yield.
Importantly, falling interest rates won’t directly affect this. As long as the firm maintains its dividend, investors who already own the stock will continue to get their £2.36 per share.
Insurance companies
I’ve chosen Admiral as an example for a specific reason. As an insurance company, the underlying business is relatively sensitive to changes in inflation and interest rates.
Falling interest rates are a good thing for the business. It increases the value of the assets held on its balance sheet and the firm can use any regulatory excess to pay dividends to investors.
There is, however, a chance that lower interest rates cause inflation to pick up. And that’s a risk – more expensive repairs can cut into profits on policies where premiums are already fixed.
Admiral, however, is exceptionally good at underwriting. Its margins are consistently the best in the car insurance industry and I think that makes it a force to be reckoned with.
Time to buy?
Anyone who buys shares now stands to get that 7.5% yield for as long as it maintains its dividend. The company isn’t guaranteed to do this, but I think there’s a strong chance.
The consensus view seems to be that interest rates are set to fall this year and I agree with this. And when they do, I expect dividend stocks to look attractive.
By then, though, I suspect it’ll be too late. In my view, the time to think about buying dividend shares is now – before falling interest rates push prices higher.
