Forget the cash ISA! I’d pick up the Centrica share price’s 8% yield today

Centrica plc (LON: CNA) could offer a significantly higher income return than a cash ISA, in my opinion.

| 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.

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.

With cash ISAs offering an income return of around 1.5% per year at best, they’re set to reduce spending power for individuals using them over the long run. Inflation currently stands at around 2.1%, which means that every £1 invested in a cash ISA is failing to offer a real-terms return.

At the same time, there are a number of stocks currently offering high yields. Among them is FTSE 100-member Centrica (LSE: CNA), which has a yield of over 8% after a disappointing period for its share price. With the potential for an improving business model, though, it could be worth buying for the long term.

High valuation

Of course, not all income stocks may be worth buying at the present time. Reporting on Monday was self-storage company Lok’nStore (LSE: LOK), which appears to be overvalued given its financial outlook. It trades on a price-to-earnings (P/E) ratio of 35, despite being forecast to post an earnings rise of 5% in the current financial year. It has a dividend yield of around 2.8% which is only just covered by net profit. As such, it appears to lack a margin of safety, as well as significant dividend growth potential.

Trading in the first half of its financial year has been strong, with revenue rising by 7.7%. Its self-storage unit occupancy was up 8%, while price-per-let square foot increased by 1.4% compared to the same date a year ago. As such, its business appears to be performing relatively well, and further developments to its strategy could enhance this further. But with Lok’nStore having such a high valuation, it appears to be a stock to avoid at the present time.

Income potential

Meanwhile, Centrica’s P/E ratio of 11 indicates it offers a significant margin of safety. Furthermore, a dividend yield of 8.4% in the current year is almost six times the return which is available on a cash ISA. Although dividends are due to be covered 1.1 times by profit this year, such a high dividend yield is likely to mean the income return on offer is significantly greater than many of its FTSE 100 peers able to grow dividends at a fast pace.

Of course, Centrica has faced a challenging period. It’s found the delivery of a new strategy to be somewhat difficult, with its financial performance weak in recent years. However, with it expected to become increasingly efficient as it delivers a variety of cost savings, its financial performance could improve over the medium term.

Since Centrica faces regulatory and political risks at the present time, its shares may lack the defensive appeal which the utility sector has offered in recent years. However, with what seems to be a low valuation and impressive income prospects, it could deliver a higher long-term return than a cash ISA.

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.

Peter Stephens owns shares of Centrica. 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

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »