A year ago, it seemed likely that interest rates would have risen by at least 0.25% from their historic low. The UK economy was performing relatively well and while a General Election was on the horizon, it seemed as though ‘life support’ (i.e. a rock-bottom interest rate) was no longer necessary.
Today it looks like high-yielding stocks could remain in vogue for at least another year. Why?
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The economy has performed relatively well in the last year but interest rates are no higher. Income-seeking investors continue to struggle since their cash balances are providing a relatively poor return. And while zero inflation means a real return on offer even from cash, a gross yield of around 2% is still very disappointing.
Looking ahead, interest rates could realistically remain at or near their lows over the next year simply because inflation is showing little sign of rising.
With a yield of 6%, GlaxoSmithKline (LSE: GSK) certainly has headline income appeal. It remains one of the highest yielding stocks in the FTSE 100 and although dividends per share are due to be frozen over the next couple of years, rapid dividend growth beyond that is very much on the horizon.
What’s behind that expected growth? GlaxoSmithKline’s drug pipeline is among the most diverse and appealing within the global pharmaceutical industry. It has multiple potential HIV treatments within its ViiV Healthcare division and with the company aiming to reduce costs by over £1bn in the coming years, it appears to have the right mix of sales growth potential as well as the scope to boost margins.
This is a key reason why GlaxoSmithKline is expected to increase its bottom line by 11% next year, which indicates that as well as being a strong income play, it also offers significant near-term growth potential.
Similarly, SSE (LSE: SSE) also has a very desirable yield of 6.2% and unlike GlaxoSmithKline, its dividends are forecast to rise next year. The increase is expected to be just 1.6%, but that’s still ahead of inflation and so represents a real-term rise in shareholders’ incomes.
SSE also seems well-placed to at least match inflation when it comes to increases in shareholder payouts over the long term. Its dividends are currently covered 1.3 times by profit, which is relatively healthy. And its shares offer upside potential via a relatively appealing valuation. For example, SSE trades on a price to earnings (P/E) ratio of 12.7 indicating that it could deliver an excellent total return next year.
Steady as she goes
Meanwhile insurance business Admiral (LSE: ADM) currently yields 5.9% and while an increase to insurance premium tax has the potential to squeeze profitability within the car insurance sector, it appears to be well-positioned to overcome any such short term problems. The reason? The wide range of brands Admiral owns. They provide the company with a commanding position within the car insurance industry, allowing it to maintain relatively high levels of profitability.
As well as being a high-yielding stock, Admiral also offers a degree of consistency. For example, earnings increased in four of the last five years and with it having a beta of 0.86, it should offer a less volatile shareholder experience than many of its index peers in 2016.