Finding income stocks with wide margins of safety may become more difficult over the medium term. With inflation rising to 2.9% and having the potential to increase further, demand for income stocks could increase. This could cause their valuations to rise, while their yields may also be compressed to some degree. Therefore, buying such stocks now could be a shrewd move. Here are two companies which seem to offer high yields at fair prices.
Improving performance
Reporting on Monday was global speciality and reinsurance products company Lancashire Holdings (LSE: LRE). It announced its range for the estimated net ultimate losses arising from hurricanes Harvey, Irma and Maria, as well as the two recent earthquake loss events in Mexico.
The aggregate estimated net ultimate losses for these events is expected to be in a range of $106m to $212m, after anticipated recoveries from its outwards reinsurance programme and the impact of outwards and inwards reinstatement premiums. The estimate falls well within the company’s modelled loss ranges for these types of catastrophic events.
Clearly, it has been an eventful period for the company, and the final settlement of all claims is likely to take place over an extended period of time. However, the business appears to have a strong balance sheet and sound operating model. This should ensure that its income prospects remain upbeat, with the stock currently yielding 6.4%.
Looking ahead, Lancashire Holdings is expected to increase its earnings by 41% next year. This puts it on a forward price-to-earnings (P/E) ratio of 15.3, which seems to be a fair price to pay for the company given its strong income outlook. With a dividend yield of more than twice the rate of inflation, the stock could become an increasingly popular income play.
Impressive outlook
Also offering an upbeat outlook for income investors is RSA Insurance (LSE: RSA). The company has delivered a successful turnaround in recent years after having experienced some regulatory challenges. Under its management team, it has put in place a sound strategy which is expected to record a rise in net profit of 11% in the current year, followed by further growth of 18% next year.
This rate of growth puts RSA on a price-to-earnings growth (PEG) ratio of just 0.7, which suggests that it offers growth at a reasonable price. Alongside this, the company continues to have a relatively high dividend yield. It currently stands at 3.5%, but with dividends due to rise by 37% next year, it is expected to yield 4.7% in 2018.
Despite such a rapid rise in dividends being forecast over the next year, RSA’s dividend cover is expected to remain at 1.8 times, which suggests that further dividend growth is on the cards. As such, now could be the perfect time to buy it ahead of a potentially improved period of performance for the company’s share price and total return.
