The recent turmoil in global stock markets, combined with growing fears of a sharp slowdown in the Chinese economy, has led to a drastic change in expectations about when the Bank of England might begin to raise interest rates.
With inflation likely to remain sluggish, many economists are now expecting that rates will only begin to rise during the second half of 2016, with some economists predicting a rise only by 2017 or possibly even later. Only earlier this month, a majority of analysts had been expecting interest rates would begin to rise by early next year.
If interest rates are expected to remain at today’s record low levels for longer, then this could be an opportunity to buy high yielding shares.
Shares in HSBC (LSE: HSBA) currently yield 6.3% and its dividend seems to be well covered. In 2014, its dividend was been covered 1.38x by its earnings, and analysts expect cover will rise to 1.60x by 2015. HSBC’s balance sheet is strong, with the bank benefiting from a Tier 1 common equity capital ratio of 11.6% and a leverage ratio of 4.9%.
But, although the bank’s dividend does seem sustainable, HSBC’s share price may not yet have bottomed out. With more than two-thirds of its operating profits coming from Asia, HSBC is highly exposed to the slowdown in Asia. Things aren’t much better in Europe and the Americas either. HSBC lacks scale in many markets, and this explains why its cost efficiency and return on equity has been lagging many of its competitors for a number of years.
British American Tobacco
British American Tobacco (BATS) has historically been a defensive stock, as tobacco consumption is generally considered to be relatively non-cyclical. The tobacco giant has a robust track record of growing its dividends.
Between 2010 and 2012, BATS increased its dividend by 34.0%. Dividend growth has slowed since, but it still remains relatively attractive. Between 2012 and 2015, its dividend payments grew by 11.2%. Shares in BATS currently yield 4.3%, and analysts expect its dividend will rise by 5.4% this year, and 4.7% in the following year.
Royal Mail (LSE: RMG) should be benefiting from the increase in on-line shopping and the loss of quite a few of its smaller logistics competitors. But this wasn’t reflected in its latest trading update. In the three months to June 28, revenues were broadly unchanged, as the loss of letter volumes had offset the gain from the increase in parcel deliveries.
Although growth is virtually non-existent, Royal Mail has its dividend well-covered. In 2014/5, it was covered just over 2.0x earnings. Shares in Royal Mail currently yield 4.6%, with analysts forecasting a slight rise to 4.7% in 2016.
GCP Infrastructure Investments
GCP Infrastructure Investments (LSE: GCP) is one of the most defensive stocks on the market. The fund invests primarily in UK infrastructure debt, which is secured against long dated public sector-backed cash flows.
The primary focus of this fund is to provide shareholders with sustainable, long-term distributions and to preserve the capital value of its investment assets over the long term. But, because a significant proportion of assets is inflation-linked, the fund should also benefit from some capital growth.
Despite the turmoil on global stock markets, the investment fund’s share price has remained stable over the past few weeks. Shares in the fund currently yields 6.4%, and trade at an 11% premium to its net asset value.
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Jack Tang has no position in any shares mentioned. 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.