3 Of The Best Income Stocks In The FTSE 100: HSBC Holdings plc, BAE Systems plc And Legal & General Group Plc


With a yield of 5.6%, it’s clear why HSBC (LSE: HSBA) (NYSE: HSBC.US) has income appeal right now. However, HSBC also has superb dividend growth potential, too, and this means that the bank’s yield could be set to rise considerably over the medium term.

In fact, HSBC has a payout ratio of just 63% and this not only means that its dividends are very sustainable, with there being sufficient headroom with which to make shareholder payouts, but also that there is scope for strong dividend growth. For example, from 2015 to 2016, HSBC is expected to increase dividends per share by 6%, which puts the shares on a forward yield of 5.9%.

Furthermore, with HSBC’s net profit forecast to rise by 18% this year, it appears as though the bank is hitting a purple patch which could lead to an even faster rate of growth in dividends over the medium term.


Over the next two years, BAE (LSE: BA) (NASDAQOTH: BAESY.US) is forecast to increase dividends per share at an annualised rate of 2.7%. While this may sound like a somewhat lowly figure, it is worth bearing in mind that inflation currently stands at zero and is expected to turn to a negative number during the course of the year. This means that BAE offers a solid real return, which holds considerable appeal for income seeking investors.

In addition, BAE’s profitability is also on the rise after a challenging period that included a profit warning. This bodes well for the company’s shareholder payouts and makes BAE’s present yield of 4.2% much more sustainable.

And, with BAE enjoying significant barriers to entry which help to protect margins, as well as strong cash flow and a sound balance sheet, it appears to be a very appealing income stock, with these attributes also having the potential to act as catalysts for share price gains over the medium to long term.

Legal & General

While there are a number of great value stocks in the insurance sector, Legal & General (LSE: LGEN) more than holds its own versus sector peers. That’s because it offers an excellent income stream, with the company’s shares currently yielding a very impressive 5%.

Looking ahead, there could be considerable scope for rapid increases in dividends, since Legal & General has a payout ratio of 70%. This means that the current level of dividend is very sustainable and, when combined with double digit earnings growth over the next couple of years, could see Legal & General’s yield move above 5% over the medium term.

Certainly, further share price gains could suppress yield rises, with investor sentiment being exceptionally strong and helping Legal & General’s valuation to rise by 142% in the last ten years. As such, now could be the perfect opportunity to buy a slice of Legal & General.

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