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These 2 income stocks will thrash Philip Hammond’s new savings bond

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I never thought I would say the words “I miss having George Osborne as Chancellor” but for a moment during the Autumn Statement on Wednesday, I did. That was when his replacement Philip Hammond came to what should have been his crowd-pleasing finale, the announcement of a new “market-leading savings bond”, to be issued by National Savings & Investments.

Flat Phil

When Osborne unleashed the hugely popular Pensioner Bonds, he did so with his customary self-satisfied rhetorical flourish… and the bonds, which paid up to 4%, sold out quickly. There was no similar excitement this time round. Spreadsheet Phil’s delivery was flat and the sparse details he gave us were distinctly underwhelming. The bond will pay a headline rate of just 2.2% over a three-year term, which works out as just £66 a year, or a total return of £202 over three years.

I guess you say that 2.2% is okay, given that the average easy access savings account now pays just 0.43%, according to Moneyfacts. It is only slightly than best buy fixed rate savings bonds, with Tesco Bank paying 1.62% over three years, and with a somewhat higher maximum limit of £5m.

Dividend delight

Fixed-rate bonds are fine for people who do not want to take any risks at all with their money, but for long-term investors who can withstand short-term volatility, FTSE 100 dividend stocks offer a far better prospective return.

One stock that springs to mind is long-term dividend hero British American Tobacco (LSE: BATS). It currently offers income of 3.47% a year, but crucially, this is a rising income, because management has a superb track record of increasing the value of its dividend payments year after year. The company has paid dividends every year since it listed in 1998, and has never cut the payment in that time.

In 2011, the dividend was paid at 126.50p for each share held. That has risen steadily to 154p last year, and is forecast to hit 179.50p in 2017. British American Tobacco has delivered capital growth on top, with its share price up 55% in the last five years. Today it is relatively cheap by its high standards, trading at 20 times earnings (last time I looked it was closer to 25 times). Naturally, the dividend income isn’t guaranteed and the share price can be volatile, but if you can invest for five years or more, you are likely to thrash the return on Hammond’s “market-leading” bond.

Three times as nice

Big six energy firm SSE (LSE: SSE) is another long-term FTSE 100 dividend hero, this one offering an even more generous yield of 6.12%. There are risks to investing in this utility stock as well — recent share price growth has been disappointing, up just 16% over the past five years. The generous dividend is covered just 1.3 times from earnings and could be vulnerable to a cut unless cash flow picks up. As I said, no guarantees.

However, management aims to increase the dividend by the retail price index, which is currently 2%, giving scope for growth. By March 2018 the yield is forecast to hit 6.4%, almost triple the return on Hammond’s bond.  Why settle for his damp squib when you can get an electric income instead?

These are just two of the many FTSE 100 companies offering hard-pressed savers generous dividends ranging from 4% to 7% a year.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.