With interest rates set to stay low for a number of years, the pressure on savers is set to continue. Certainly, with deflation now being a reality the return on cash balances has improved in real terms, however it still amounts to a rather paltry return by historic standards. In fact, a more normal return on cash would be 4% or 5%, while at the present time obtaining more than 1.5% – 2% seems nigh on impossible unless you are willing to tie up your capital for a prolonged period.
As a result, stocks paying high dividends could be a sensible answer. Certainly, they come with more risk than having a cash balance, with the value of your investment having the potential to fall in nominal terms. However, they also offer the prospect of long term capital gains, too and, for the following three companies, the risk/return ratio appears to be extremely favourable.
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With a yield of 4.2%, AstraZeneca (LSE: AZN) (NYSE: AZN.US) easily beats the FTSE 100’s yield of 3.5%, and is far more appealing than holding cash. That’s because, while it is continuing to see its top and bottom lines come under pressure from the loss of patents on key, blockbuster drugs, it is expected to return to growth in 2017. This, plus the potential for further bids from pharmaceutical peers, means that investor sentiment is likely to remain relatively upbeat in 2015 and beyond.
Furthermore, with AstraZeneca having a payout ratio of just 67%, there is considerable scope for increased dividends over the medium term. In fact, a number of its global pharmaceutical peers pay a much higher proportion of profit as a dividend, which makes AstraZeneca a high yield, high potential income stock.
Also seeing its bottom line decline at the present time is BHP Billiton (LSE: BLT) (NYSE: BBL.US). It is suffering from depressed commodity prices and, despite having excellent diversity, it continues to see its profitability come under pressure.
Still, BHP Billiton remains a top notch income play, with it having sound finances, a great yield and also offering excellent value for money. For example, BHP Billiton has a debt to equity ratio of just 41%, which indicates that its balance sheet is relatively healthy and, with a yield of 5.7%, is among the highest yielding shares in the FTSE 100. Furthermore, BHP Billiton has a free cash flow yield of 8%, which indicates that it offers good value for money at the present time.
While AstraZeneca and BHP Billiton are not the most stable of businesses, Imperial Tobacco (LSE: IMT) certainly is. For example, over the last five years its share price has risen by 87%, with dividends increasing by 68% during the same time period.
Looking ahead, the tobacco industry is undergoing a significant change, with e-cigarettes being the biggest change in the sector for a generation. Certainly, it could prove to be a somewhat less harmful option for smokers (although more research needs to be carried out on the effects of e-cigarettes in the long run), and for Imperial Tobacco it offers the prospect to increase sales and profitability at a time when cigarette volumes are falling. And, with a dividend yield of 4.3%, it offers its investors a top notch income in the meantime, too.