With interest rates cut to 0.25%, dividends are likely to become increasingly important for vast swathes of investors. It would therefore be of little surprise for higher yielding shares to see their prices increase. Greater demand from investors can lead to a compression in their yields and as such, now could be a great time to buy these three income stocks, not only for their yields, but also for their capital gain potential.
SSE’s (LSE: SSE) yield of 5.8% is among the highest in the FTSE 100 and dividend growth is very much on the horizon. SSE is forecast to increase dividends per share by 2.3% next year and its goal remains to deliver a rise in shareholder payouts that at least matches inflation over the medium term.
While inflation is near zero, this may not hold a great deal of appeal to investors. But with sterling weakening and likely to weaken further, inflation could rise as import costs increase. In this scenario SSE’s growing dividend could be a major ally.
SSE also offers good value for money. It trades on a price-to-earnings (P/E) ratio of just 13.2, which indicates that there’s upward rerating potential on offer at a time when a number of utility companies have P/E ratios of over 20.
Although Unilever’s (LSE: ULVR) yield of 2.9% is lower than the FTSE 100’s yield of 3.6%, it nevertheless has huge potential as an income stock. That’s because its payout ratio stands at around two-thirds of profit, which indicates that there’s scope for Unilever to raise dividends at a faster rate than profit growth over the medium-to-long term. Certainly, it needs to invest heavily in marketing and potentially in acquisitions, but its relative stability and resilient business model mean that a greater proportion of profit could realistically be paid out to its shareholders in the form of dividends.
Furthermore, Unilever has strong growth potential in emerging markets. Around 60% of its sales are generated from the developing world and with 75% of Chinese urban dwellers expected to earn between $9,000 and $34,000 by 2022, the growth potential of consumer goods within the world’s second largest economy is significant. Unilever is well-placed to benefit from this and its dividends could rise rapidly as a result.
AstraZeneca’s (LSE: AZN) acquisition strategy is expected to cause its bottom line to move from negative to positive growth over the medium term. This has the potential to positively catalyse a dividend that has been stagnant in the last five years as the company has struggled to come to terms with the loss of patents on key blockbuster drugs.
Still, AstraZeneca yields over 4% right now and this makes it a better income option than the wider index’s yield of 3.6%. And with AstraZeneca’s dividends being covered 1.4 times by profit, they’re sustainable even if profit comes under further pressure over the near term. Plus, with AstraZeneca having a beta of 0.7, its share price should be less volatile than the wider index, which may appeal to income-seeking investors while the FTSE 100’s outlook is uncertain.
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Peter Stephens owns shares of AstraZeneca, SSE, and Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.