I am ignoring the cash ISA and buying these FTSE 100 5%-yielders instead

The income from these FTSE 100 (INDEXFTSE: UKX) shares could give your portfolio a boost in 2019.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

According to my research, the best interest rate available on a flexible cash ISA today is just 1.45%. In comparison, the FTSE 100 supports an average dividend yield of 4.5% which, in my mind, makes the index a much better investment if you’re looking to grow your money.

What’s more, this dividend is only an average. There are some companies in the FTSE 100 that offer even bigger dividend yields. Today I’m going to take a look at two such companies.

Built for the long term

The first stock is financial services group Legal & General (LSE: LGEN). What I like about this company is that it’s built for the long term. Tens of thousands of investors and savers have trusted the business with their retirement funds, so it has to run the business from a long-term perspective. That means conservative operational management and a progressive, sustainable dividend policy. In other words, I reckon Legal & General has one of the safest dividends in the FTSE 100.

At the time of writing, the group’s dividend yield stands at an impressive 7.2% and the distribution is covered 1.8 times by earnings per share (EPS). City analysts are expecting this to grow in line with earnings for the next few years, which seems prudent as the company cannot afford to overstretch itself.

On top of the market-beating dividend yield on offer, shares in this financial conglomerate are currently trading at a relatively undemanding forward P/E of 7.7. The rest of the financial services industry is trading at an average multiple of around 11 times forward earnings so, from this perspective, the stock looks undervalued. 

The low valuation, coupled with the market-beating yield, is too good to pass up in my view, especially when cash ISAs offer just 1.45%.

Durable moat

Another FTSE 100 income champion I think might be a better investment than putting your money in a cash ISA is wealth manager St. James’s Place (LSE: STJ). 

St. James’s is one of the UK’s largest and most respected wealth managers, which gives it a substantial competitive advantage over the rest of the financial services industry.

I think this competitive edge, or what Warren Buffett calls a ‘moat’, will ensure that St. James’s continues to grow steadily for many years. Over the past five years, the company has more than doubled net profit and analysts believe EPS will jump 58% in 2018, followed by growth of 16% in 2019.

Analysts also believe that growth will support a dividend increase of 15% for 2018, and 30% for 2019. If the firm meets these targets, it will yield 5.9% for 2019.

Dividend growth

As earnings have expanded steadily since 2012, the company has also produced an enviable record of dividend expansion. Since 2012, the distribution to investors has grown more than 300%, showing that St. James’s is committed to rewarding shareholders.

Overall, considering the group’s strong competitive advantage and position in the UK’s wealth management industry, I think it is highly likely St. James’s will continue to reward investors handsomely for many years.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 51% in 2024, this FTSE 250 stock is flying!

This writer takes a look at one high-flying FTSE 250 share that still looks good value despite surging to an…

Read more »

Investing For Beginners

Here’s how I’m trying to prevent a stock market crash from ruining my portfolio

Jon Smith explains which shares he's avoiding and what he's thinking of buying to try and protect his portfolio from…

Read more »

Bearded man writing on notepad in front of computer
US Stock

Call me crazy, but here’s why I’m eyeing up the CrowdStrike share price

Jon Smith notes the carnage caused by Friday's global outage, but flags up why he's thinks the CrowdStrike share price…

Read more »

Investing Articles

What do Hargreaves Lansdown results mean for the share price?

The Hargreaves Lansdown share price has surged in recent months on takeover expectations, but what will the recent results mean…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Newly minted S&P 500 stock CrowdStrike just crashed! Here’s why

Shares of S&P 500 firm CrowdStrike collapse as the company lies at the centre of a global IT outage. What…

Read more »

artificial intelligence investing algorithms
Investing Articles

Is Nvidia heading for the mother of all tech stock crashes?

Nvidia stock has soared, and the company briefly became the most valuable on the planet. But not everyone’s an AI…

Read more »

Dividend Shares

The BP share price is down 15% in 3 months. Time to buy?

In the space of just a few months, the BP share price has fallen by a double-digit percentage. Is this…

Read more »

Investing Articles

A 5.4% dividend bargain I’ll buy over Lloyds shares

Harvey Jones loves his Lloyds shares but now he's found a high-yielding FTSE 250 stock that may offer even more…

Read more »