It now seems likely that at some point in the future, interest rates will move lower. They could even do so tomorrow, with the Bank of England showing concern recently surrounding the outlook for the UK economy.
Even if interest rates don’t fall, the current situation for income-seeking investors is rather dire. Cash returns are exceptionally low, the housing market appears to be overheated and with there being a risk of higher inflation if interest rates do fall (and because sterling is weaker), bonds lack appeal too.
Therefore, buying high quality, high-yield stocks seems to be the best solution for income-hungry investors.
Dividend growth
One such company is Vodafone (LSE: VOD). The telecoms giant currently yields just over 5% and with it having a sound track record of dividend growth, increases to shareholder payouts seem likely over the medium-to-long term.
For example, Vodafone has raised dividends on a per share basis from 9.5p in 2012 to 11.5p in 2016. That’s an increase of 21% in two years and looking ahead, there’s scope for further gains. That’s because Vodafone is expected to increase its bottom line by 29% this year and by a further 17% next year, which could lead to an even faster rate of dividend increase.
Furthermore, Vodafone has a geographically diversified business and is expanding into new product lines such as pay-TV and this should help to make its earnings profile more resilient. Therefore, for income-seekers, Vodafone remains an obvious choice.
Logical Buy?
Similarly, Direct Line (LSE: DLG) also has huge dividend appeal. It’s expected to yield around 7.2% in the current financial year from a dividend due to be covered 1.2 times by profit. This indicates that Direct Line has sufficient headroom when making dividend payments for them to be sustainable, which clearly bodes well for the long-term future of its shareholder payouts.
In addition, Direct Line offers excellent value for money right now. It trades on a price-to-earnings (P/E) ratio of just 12, which indicates that there’s upward rerating potential. Certainly, weakness in the UK economy could hurt its prospects over the medium term, but with a high yield and wide margin of safety, Direct Line seems to be a logical buy.
Emerging markets
Meanwhile, Diageo (LSE: DGE) remains a relatively appealing income play. Although it can’t compete with the likes of Vodafone and Direct Line when it comes to yield, Diageo has strong dividend growth potential. Notably, it’s well-positioned within emerging markets such as China and India, with it having a wide range of products that should provide its dividends with a robust long-term outlook.
Furthermore, Diageo currently has a dividend coverage ratio of 1.5, which indicates that there’s scope for a rapid increase in shareholder payouts over the coming years. And with sterling being weak, Diageo could gain a boost from currency translation, too. Therefore, while its yield of 2.7% isn’t particularly impressive, it could become a top-notch income play over the coming years.
