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2 stocks with 5%+ yields and room to grow

Image: Royal Mail Group. Fair Use.

Finding companies which offer relatively high yields as well as a growing dividend can be tough. After all, fast-growing dividends usually cause investors to bid up the price of a stock, which compresses its yield.

However, even with the FTSE 100 close to its record high, there are still stocks which offer stunning income potential. Here are two companies which could prove to be excellent income plays not just in 2017, but in the long run, too.

A recovery stock

Capita  (LSE: CPI) issued a profit warning back in September that knocked 48% off its share price. Clearly, this may put some investors off buying it, since the company is experiencing a difficult period from which it may take time to recover. However, from an income perspective it seems to still be a strong investment opportunity, both in the short run and long run.

In the current year, Capita is expected to yield 6.4%, which is around 2.7% higher than the FTSE 100’s yield. Therefore, even if inflation rises to as much as 3% in the current year (as the Bank of England forecasts), the company should continue to offer a real-terms return for its investors. Beyond this year, dividends are likely to grow due to a high dividend coverage ratio. Shareholder payouts are covered 1.8 times by profit, which indicates they could rise at a faster pace than profit growth over the coming years.

Clearly, Capita remains a relatively high risk option. Its turnaround plan has only just commenced and further problems cannot be ruled out. So, its shares may remain volatile in the coming months. However, with its earnings due to return to growth next year, now could be a good time to buy it ahead of improving financial performance.

Value investing opportunity

While the wider index may be trading near to a record high, Royal Mail (LSE: RMG) appears to offer exceptional value for money. For example, it trades on a price-to-earnings (P/E) ratio of 10, which indicates that it offers a wide margin of safety. This could protect investors against falls in the value of the FTSE 100 and also allow the company’s shares to be rerated upwards over the medium term.

Royal Mail yields 5.7% from a dividend which is covered 1.8 times by profit. This shows there is scope for dividend growth to beat inflation, which should allow the company to remain a popular income choice. This could boost its share price, especially since its European operations are performing well and offer bright long term growth potential.

Of course, the Letters division and, to some extent, the Parcels one in the UK have both disappointed somewhat. Further difficulties in those areas mean earnings at the company are forecast to flat line next year. However, due to its income appeal and the threat of higher inflation, now could be the right time to buy a slice of the business for the long term.

But should you focus on this company before Royal Mail and Capita?

Despite their income potential, another company could deliver higher income returns. In fact it's been named as A Top Income Share From The Motley Fool.

The company in question could offer strong dividend growth and a high yield, while its business model may allow it to record higher profit growth than its industry peers. As such, it could be a top income stock for 2017 and boost your income this year.

Click here to find out all about it - doing so is completely free and comes without any obligation.

Peter Stephens owns shares of Capita Group and Royal Mail. 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.