Goldman Sachs‘ new Marcus savings account is proving popular, as its 1.5% interest rate is higher than many alternatives. Personally, I’m not that keen. With UK inflation currently running at 2.4%, putting cash into a Marcus account means the purchasing power of your money will fall by 0.9% each year.
Although I think it’s important to keep several months’ living expenses saved in cash, I don’t think it’s a realistic way to save for retirement. I prefer to invest in high-yield dividend stocks such as the two FTSE 100 companies I’m going to look at today.
Simple and improved
A “simpler, improved offer”. That’s the promise being made by Mark Read, who recently took over as chief executive at advertising group WPP (LSE: WPP) from founder Sir Martin Sorrell.
WPP has been accused of falling behind the times. Some say it has become too complex and fragmented. But Mr Read believes the firm’s assets can be reshaped to succeed in a market where big data and technology will be as important as creative talent.
My colleague Ed Sheldon covered Tuesday’s strategy update in more detail here. Today, I want to explain why I think these shares could be a good long-term buy at current levels.
Is the price right?
I’m interested in finding companies that are undervalued compared to their earning power. Buying such stocks tends to deliver good results, as eventually the market will recognise the shares are too cheap.
One of the main metrics I use is earnings yield, which compares operating profit with enterprise value (market cap plus net debt). This is effectively a measure of the profit margin earned by the owner of a company, before any tax or interest payments.
WPP’s earnings yield for the 12 months to 30 June was 12.6%. This is well above my preferred minimum of 8%. In my view, the shares could offer good value at this level. I also believe that as long as cash generation remains at a similar level to past years, Mr Read should be able to avoid cutting the dividend.
Broker forecasts for 2018 put the shares on a price/earnings ratio of 8.1, with a dividend yield of 6.9%. In my view this could be a good time to start buying WPP shares.
Mining riches
One of my top picks from the London mining sector is iron ore giant Rio Tinto (LSE: RIO). Back in August, the company announced plans for $7.2bn of shareholder returns and said its net debt had fallen to just $5.3bn.
To put this debt level in context, the group reported an underlying profit of $4.4bn for the first half of 2018 alone.
I’d buy for the yield
At some point the mining industry will face another cyclical downturn. But for now, companies such as Rio are in excellent financial health and are generating attractive returns for shareholders. Spending on growth is being carefully managed and seems reasonable to me.
Analysts expect this firm to pay a dividend of $2.92 per share this year, giving a forecast yield of 6.1%. I see Rio as a long-term survivor. I’d buy the shares for income today and then average down during any future periods of weakness.
