Why British American Tobacco plc Plus GlaxoSmithKline plc Equals Income Heaven!

With UK inflation falling to just 0.5% in December, it seems even less likely that interest rates will rise any time soon. In fact, the Bank of England’s Monetary Policy Committee voted unanimously in its last meeting for rates to be held at just 0.5%. And, while the UK economy is among the best performing economies in the developed world, the risk of deflation means that a higher interest rate is still some way off.

As a result, the outlook for savers looks dire. In fact, it would be of little surprise for savings rates to fall before they start to rise but, for disappointed savers, there may be a solution: income stocks. And, with that in mind, here are two fine examples of shares that could make a real difference to your income in 2015 and beyond: British American Tobacco (LSE: BATS) (NYSE: BTI.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

Top Notch Yields

With yields of 3.8% and 5.4% respectively, British American Tobacco and GlaxoSmithKline combine to offer an average yield of 4.6%. That’s three times the best after-tax rate on instant access savings that is currently available in the UK and, although your capital is not without risk, both companies have excellent track records when it comes to stability.

For example, British American Tobacco has increased its bottom line at an average rate of 6.2% per annum over the last five years. Although not particularly spectacular, this compares favourably to most other blue-chip stocks due simply to the impact of the financial crisis and subsequent recession on the earnings growth of most businesses.

And, while GlaxoSmithKline’s bottom line is lower now than it was five years ago, it has managed to navigate the loss of key, blockbuster drugs better than many of its peers and, with an excellent pipeline, looks all set to grow its earnings at a brisk pace moving forward.

Looking Ahead

With both companies having betas of 0.9, it means that they should offer a less volatile shareholder experience in future. In fact, for every 1% move in the wider index, British American Tobacco and GlaxoSmithKline should see their share prices change in value by 0.9%, which could prove to be highly beneficial during challenging periods for the FTSE 100.

Furthermore, British American Tobacco’s yield looks set to increase over the next two years, with dividend per share growth of 6% per annum currently being priced in. This means that British American Tobacco could be yielding as much as 4.3% in 2016. Meanwhile, GlaxoSmithKline’s dividend is set to rise by just 0.5% per annum over the next two years, although that is still in-line with current levels of inflation, and its present yield of 5.4% more than makes up for this lack of real terms growth moving forward.


Of course, high-quality stocks such as British American Tobacco and GlaxoSmithKline are rarely cheap and, although they trade on price to earnings (P/E) ratios of 18.2 and 16.3 respectively, they could still see their ratings move higher this year. That’s because investor sentiment could pick up due to increased demand for their bright income prospects and, as such, they could deliver excellent capital gains as well as a top notch income. As a result of this, they seem to be well-worth buying for the long run – especially if you’re looking for two superb dividend plays.

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Peter Stephens owns shares of GlaxoSmithKline and British American Tobacco. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.