Sometimes I think investors have forgotten just how fabulous UK income stocks can be. I haven’t. My Self-Invested Personal Pension (SIPP) is packed with them. Maybe I got lucky, because I picked a good time to load up on them..
Three years ago, it wasn’t hard to find FTSE 100 shares yielding 8%, 9%, even 10%. Yields that high can be fragile, but I believed the payouts were sustainable. So far, they have been.
Wealth manager M&G and insurer Phoenix Group Holdings boasted double-digit yields when I bought them. Since then, they’ve delivered growth as well as income. M&G’s share price has jumped 54% over the last year, while Phoenix is up 53%. As a result their yields have fallen to 6.27% and 7.13%, respectively, on a trailing basis. That’s still pretty good though.
Blue-chip dividend stars
They’re now targeting dividend growth of around 2% annually. That’s modest, but if inflation continues to ease, it should preserve their purchasing power in real terms. In less than three years, I’m sitting on a fabulous total return of roughly 75%, with dividends reinvested. Not every high-yielder has soared though.
Insurer Legal & General Group (LSE: LGEN) has been a mixed bag. Its shares are up just 6% over three years, although they’re picking up now, rising 15% in the last 12 months. My total return is above 40%. If Legal & General shares swing back into favour, as I hope and suspect they might, the rewards could really flow.
All three stocks benefitted from a broader shift. When I bought them, UK base rates stood at 5.25%. This meant savers could earn a decent return from cash and bonds without taking risks with their capital. My view was simple. As inflation and interest rates fell, cash and bonds would look less appealing and ultra-high-yielding shares more attractive.
With UK base rates now at 3.75%, that thesis has partly played out. I’m hoping there’s more to come. Some analysts expect inflation to return to 2% this spring, helped by base effects such as last year’s tax and energy hikes dropping out of the data. There’s speculation the Bank of England could cut rates as low as 3%.
Growth and share buybacks too!
That would make these yields look even more compelling compared with lower ‘risk-free’ returns. Today, Legal & General yields 7.8%, the highest on the FTSE 100. It’s the one I’ve been adding to lately, attracted by both its income and recovery potential.
The rebound isn’t guaranteed. Nothing ever is with shares. But Legal & General has strong exposure to the growing pension risk transfer bulk annuity markets. It’s also streamlining operations, selling non-core divisions and focusing on higher-margin areas. Meanwhile, it remains committed to dividends and share buybacks.
There are risks. It’s operating in a competitive market and price pressure could squeeze margins. And with £1.2trn of assets under management, a stock market crash would hurt.
Still, generous passive income streams like these don’t come along often. If shares in M&G, Phoenix and Legal & General continue to rise, those yields will inevitably fall. In that scenario, investors may one day look back and wish they’d acted. I’m happy I did. I think all three are still well worth considering today, with a long-term view.
