With the FTSE 100 being hugely volatile at the present time and offering little in the way of sustained capital growth, stocks with high yields are proving to be a highly useful ally for long term investors.
That’s because, while the index has huge potential to rise in the coming years, the capital gains on offer in the short run may be held back by uncertainty regarding China as well as planned interest rate rises. Therefore, dividends offer not only a return but also a cash flow to invest in undervalued businesses.
One of the highest yielding stocks in the FTSE 100 is GlaxoSmithKline (LSE: GSK). It presently yields over 6% and its shareholder payouts appear to be very sustainable at their current level owing to the company’s impressive drugs pipeline as well as the changes being made to the business. Notably, GlaxoSmithKline is attempting to make substantial cost savings and become a more efficient business which, after a number of challenging years, has the potential to improve investor sentiment in the stock.
Of course, with a smaller exposure to the consumer goods market after its sale of the Ribena and Lucozade brands, GlaxoSmithKline is now more dependent upon the patent cycle than it once was. And, while in recent years it has struggled to hold back a fall in sales (revenue has fallen by 15% in the last five years), in the next two years its sales are forecast to rise by almost 8%. This could improve investor sentiment and indicate that GlaxoSmithKline may be on the cusp of improved share price performance after gaining just 5% in the last five years.
Meanwhile, Barratt Developments (LSE: BDEV) has experienced a very different recent period than GlaxoSmithKline, with its sales almost doubling in the last five years. This is mainly due to improved trading conditions for house builders and, with planning laws continuing to be very tight and interest rates set to remain low over the coming years, a fundamental supply/demand imbalance is due to remain a feature of the housing market moving forward.
Interestingly, Barratt still trades on a price to book value (P/B) ratio of just 1.7. That’s despite its share price rising by 625% in the last five years and indicates that there is considerable upside potential available. Furthermore, with Barratt yielding 4.8% and yet paying out just 57% of profit as a dividend, it has quickly become an income favourite and looks set to remain so in the medium to long term.
Investors in Tribal Group (LSE: TRB), however, have experienced major disappointment today with the company’s shares falling by 35% following a profit warning. The provider of student management systems and services for education management has focused its efforts on attracting larger customers and, as such, has failed to generate sufficient medium and small-sized opportunities to complement the larger deals. And, with a challenging trading environment, it now expects revenue and profit to be below previous guidance.
Clearly, this is a major blow for the company and, with it having no CEO at the present time, it is a period of considerable uncertainty for its investors. As such, it could be worth waiting for further news and evidence that it is turning its performance around before buying a slice of the business.
