Are these 2 stocks the income heroes your portfolio needs?

These two stocks pay income of more than 5% a year. Harvey Jones examines whether this rate of return is sustainable.

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In these days of low growth and low interest rates, you can’t beat a healthy income stream. With the FTSE 100 currently yielding 3.69%, stocks and shares are the best way of getting it. The following two UK-listed income heroes offer even more generous yields, so has your portfolio got room for them both?

Pharma fun

Pharmaceuticals giant AstraZeneca (LSE: AZN) is a dividend legend and today yields a healthy 5.3%. Its share price is up 50% over the last five years, almost double the growth rate of the FTSE 100, so it has capital growth potential as well. However, it’s down 12% in the past month following a disappointing set of Q3 results, which saw an unnerving 14% drop in product sales, and 4% drop in revenues.

This is largely down to key treatments losing their generic protection, notably prescription cholesterol medicine Crestor in the US, which now faces multiple rivals. On the plus side AstraZeneca’s growth platforms were up 3% in the quarter, and 6% year-to-date, thanks to heart treatment Brilinta, and various diabetes and respiratory treatments. Its range of next-generation cancer products also look promising.

In the year 2024

Chief executive Pascal Soriot continues to promise jam tomorrow. So how sticky are things today? More than I would like, with earnings per share (EPS) forecast to fall 3% this year and 6% in 2017, extending the negative run to six consecutive years. Soriot is projecting revenues of more than $45bn by 2023, now just seven years away. That’s quite a leap from 2017’s projected $17.67bn, and the cost of failure is high.

The longer investors have to wait for new treatments to deliver blockbuster profits, the more nervous they will be. The valuation has dipped to 12.5 times earnings to reflect that danger. All now depends on that one great unknowable: how healthy will the drugs pipeline be? Soriot is confident, saying that it’s starting to flow “at a pace we could not have anticipated three years ago,” with recent positive results for Tagrisso (lung cancer), Lynparza (ovarian cancer) and benralizumab (severe, uncontrolled asthma). Such optimism is infectious. Much will be decided in the next 12 months, but AstraZeneca still has plenty of hero potential. 

HSBC hops

Investors who took a chance on troubled Asia-focused bank HSBC Holdings (LSE: HSBA) will have been well rewarded with the share price up almost 50% in the last six months. That’s good to see, given that in the summer I said its 7.24% yield was too juicy too ignore. It still pays income of 6.2%, thrashing the average easy access savings account, which pays 0.43%.

HSBC has been slashing costs, making savings of $2.8bn a year with the promise of more to come, and disposing of non-core assets, including its $40bn Brazilian business. The $1.7bn loss on that transaction cast a shadow over Q3 profits, although adjusted profits were up a steady 7% to $5.6bn. Chief executive Stuart Gulliver’s turnaround is taking time and the dividend is covered just 1.3 times, so it could be imperilled in 2017, which will also inflict damage on the share price. Given HSBC’s recent 50% surge, it may be worth hanging back to see what the New Year brings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

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