While Cash ISA interest rates may have improved in the last year, it is still challenging to obtain an income return that is greater than 1.5%. By contrast, there are a number of FTSE 100 stocks that offer a higher income return, as well as the prospect of brisk dividend growth over the long run.
Furthermore, many large-cap shares appear to offer wide margins of safety. As such, now could be a good time to build a portfolio of FTSE 100 stocks, with these two companies worth buying today in my opinion.
Ferguson
Plumbing and heating specialist Ferguson (LSE: FERG) released a quarterly trading update on Monday, which showed that it continued to make progress during the period. Ongoing revenue increased by 6.2% to $5.27bn, with growth in the US being 8.4%. Its trading profit increased by 2.3% to $359m, with good cost control helping margins to rise slightly versus the same period of the previous year.
With a continued focus on customer service and investment in its core operations, the company seems to be well-placed to generate further growth over the medium term.
Although Ferguson has a dividend yield of just 3% at the present time, it has a good track record of dividend growth. For example, in the last four years it has delivered an annualised rise in dividends per share of 15%. Since shareholder payouts are currently covered 2.8 times by net profit, there seems to be further scope to raise dividends in future. With the company performing well from a business perspective, it could also generate impressive share price growth.
British American Tobacco
The ongoing changes within the tobacco industry are causing investors to shun British American Tobacco (LSE: BATS). The transition of smokers from tobacco products to less harmful alternatives such as e-cigarettes means that the industry may be less robust and resilient than it has been in previous years. However, it may also mean that there are growth opportunities ahead.
Since British American Tobacco has invested heavily in reduced-risk products, it appears to have a solid position in what is proving to be a fast-growing market. This could drive profitability higher, while the robust cash flow from tobacco could fund next-generation products, as well as dividend growth, over the medium term.
With dividends per share having grown at an annualised rate of 7% in the last four years, the company has a solid track record of rewarding its shareholders. Since it is due to post a rise in earnings of 9% this year, further dividend growth could be ahead. This could make its dividend yield of 7% even more appealing, while a price-to-earnings (P/E) ratio of 9.5 suggests that a wide margin of safety is on offer.
Therefore, for contrarian investors who are content to take a long-term outlook in return for improving income prospects, the company could be highly appealing.
