According to an investment survey conducted by asset manager Schroders last year, income from investing remains a priority for 86% of investors. Some investors live off the income stream from assets, while others reinvest their dividends to accelerate long-term returns.
However, not all income stocks are created equal. Chasing yield without spending time evaluating the sustainability of a payout often ends in disaster. With this in mind, here are two of the best income stocks in the FTSE 100. Both of these companies have a history rewarding shareholders and the shares currently yield around 6%.
Dividend priority
HSBC (LSE: HSBA) is one of London’s top income stocks. The bank has always put its dividend first, which is why over the past few years, as its peers have been cutting payouts, HSBC has maintained its dividend while selling off non-core assets to generate cash.
Today, shares in HSBC support a dividend yield of 6.2%, and the payout is covered 1.2 times by earnings per share. Unfortunately, there’s not much scope for this payout to increase in the near term as the bank is currently struggling to find growth. Management’s plan to withdraw from several emerging markets and redeploy assets within China has not yielded the kind of growth initially targeted and now the business is just ticking over.
Still, considering the headwinds facing the banking industry, HSBC is outperforming its peers. With a tier one capital ratio of 13.6% at the end of 2016 it is also well capitalised and unlikely to need to cut its payout to preserve cash anytime soon.
Defensive pick
Even though HSBC is a dividend champion, the bank comes second to Vodafone (LSE: VOD). As a telecoms company, this is one of the most defensive businesses around, which is great news for the firm’s dividend.
Over the years the group has consistently paid out most of its earnings after capital spending to investors, and several years ago the company paid one of the largest special dividends to investors, even seen after selling its holding in US mobile carrier Verizon Communications.
After a multi-billion pound capital spending programme designed to upgrade all of the company’s European infrastructure, Vodafone is now in an excellent position to grow earnings and its dividend as customers flock to the company’s offering. Further, management is trying to consolidate the group to improve cash flow and margins. Its ‘fit for growth’ programme, launched in 2014, is still being worked through but there are some signs that the transformation is starting to work.
Cash generated from operations has risen from €7.4bn for fiscal 2014 to €12.4bn for fiscal 2016. With the reorganisation of Vodafone’s Indian assets, there may be more cash flow growth on the cards. At the time of writing shares in Vodafone support a very attractive dividend yield of 5.9%.
