These 3 top yielders destroy today’s low interest rates

Stop worrying about falling savings rates and start exploring top FTSE 100 stocks like these, says Harvey Jones.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Much has been written about how record low interest rates are punishing savers but few people can complain about the plentiful yields of around 5% and 6% available on the FTSE 100 today. However, as you consider where to invest, you need to look at the stories behind the yields as some are more solid than others.

Aviva

Two numbers jump out at me when I look at insurance company Aviva (LSE: AV). First, the share price is down 18% over the past year. Second, it nonetheless trades at a pricey valuation of 18.44 times earnings. Naturally, this is down to a sharp drop in earnings per share (EPS), which fell 53% in 2015, although they’re now forecast to rise a whopping 96% in the current year, and another 10% in 2017.

This suggests that Aviva isn’t as overvalued as it first seems, a view confirmed by its forecast valuation of just 8.7 times earnings. Better still, it currently yields 5%, and this is expected to grow to 5.6% by the end of this year, and 6.2% by the end of 2017. Dividend cover is currently a narrow 1.1, but management remains progressive, announcing a 10% rise in the interim dividend to 7.42p a share earlier this month. With a 30% increase in first-half operating profits to £1.325bn, the dividend looks solid for now.

Pearson

A high yield isn’t everything, of course. You need a successful company to back it up and keep the cash flowing. Unfortunately, international media and education company Pearson (LSE: PSON) hasn’t been successful lately, its share price falling 36% in the past three years. Investors hoping for a turnaround will have been disappointed by its recent first-half interims, which revealed a 7% drop in underlying sales to a worse-than-expected £1.866m, and a drop in operating profit from £39m to £15m.

Pearson has been hit by falling college enrolments and shrinking demand for vocational studies, as well as collapsing demand for textbooks in South Africa. Chief executive John Fallon is fighting back by cutting 4,000 of the headcount and simplifying the business after his predecessor Marjorie Scardino’s ill-fated acquisition splurge, but the turnaround will take time, even if it does succeed. EPS are forecast to drop 21% this year, although may bounce back by 16% in 2017. Today Pearson yields 6%, covered 1.4 times, but dividends aren’t guaranteed and should come under pressure unless Fallon’s fightback bears fruit. 

SSE

Few investors buy utility giant SSE (LSE: SSE) for its electric growth prospects but a dividend that has consistently hovered around 6% has provided ample compensation, as it does today, trading on a current yield of 5.87%. However, there is a question mark over how sustainable this is, and cover now looks a little thin (although not yet disastrously so) at 1.3.

SSE is being menaced by regulatory attempts to boost competition and provide alternatives to the big six, and it lost 50,000 gas and electricity customers in the three months to 31 March, although it still boasts 8.16m customers. Brexit will add to the financial, regulatory and political environment uncertainty. Planned capital and investment expenditure of up to £6bn over the next four years will prove a drain, and unless cash flow significantly improves, its proud record of always increasing the dividend since 1992 could be under threat. However, it’s still forecast to yield 6% in March 2018, manna for today’s savers.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has previously held shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »