If you’re lucky enough to have £2,000 at your disposal, there’s a world of FTSE 100 stocks you could put it in. Which ones you choose will depend on your personal circumstances, for example, whether you want growth or dividend income, and what stocks you already hold.
Right now, there are many top FTSE 100 names offering dizzying yields of 5% and more. This is a golden age for income seekers and the following two would be at the top of my list.
Lloyds Banking Group
Before the financial crisis, Lloyds Banking Group (LSE: LLOY) was a renowned dividend income machine, and it is slowly recapturing its former status. Right now, it offers a forecast yield of 5.5%, well above the 4.4% average for the index as a whole. Better still, it is covered 2.1 times earnings, so the income looks pretty safe.
In fact, that income is more likely to rise than fall, with City analysts predicting the yield will climb to 5.8% next year. You can buy Lloyds at a forecast valuation of 8.3 times earnings, roughly half the FTSE 100 average of 17 times. That’s a bargain price but does beg the question – why is the Lloyds share price so cheap?
As a domestic bank with little international exposure, it is in the front line of current UK political and economic uncertainty. A bad Brexit or global recession could hit it hard, by triggering a surge in debt impairments. Today’s low interest rates are squeezing net lending margins too, making it harder to post a profit.
However, the long-running PPI scandal is now drawing to a close, even though it left a nasty parting shot with the final surge of compensation claims virtually wiping out Q3 profits. What happens now will depend on next Thursday’s general election result. A market-friendly victory could see Lloyds soar faster than most. It may offer long-term growth potential too.
If you want excitement, turn away now because power transmission specialist National Grid (LSE: NG) is not the stock you are looking for.
As the system operator of Great Britain’s electricity and gas supply, managing the network and distribution of electricity and gas that powers all our homes and businesses, National Grid needs to be reliable. This means it does not offer massive growth opportunities and moreover, the group’s profits are regulated. If they were to surge suddenly, political pressure would put a stop to it. So don’t expect the National Grid share price to go anywhere fast. In fact, it trades at similar levels to five years ago.
What it does offer is a solid yield, currently forecast to be 5.5%. That’s hugely tempting with the average Cash ISA paying just 0.95%. It’s yours for a steady valuation too. The National Grid share price always seems to be trading at around 15 times earnings, as it is today.
Many investors overlook the fact that it has extensive operations in the north east of the US, which gives it a cushion against domestic political worries, primarily the election and Brexit. The big worry is that Jeremy Corbyn’s Labour has threatened to nationalise its operations. So you may want to delay any purchase until after next week’s vote.