Sometimes I wonder whether today’s income investors know how lucky they are. The following three stocks all yield 5% or more, without offering undue risk. So why aren’t they in your portfolio?
Turn up the heat
Winter is coming, which is traditionally good news for British Gas owner Centrica (LSE: CNA). Although that hasn’t been the case in recent years, as a series of mild UK winters have hit usage. Several years of low commodity prices have added to the pain, contributing to three years of negative earnings per share (EPS) growth, although some hope natural resources prices will pick up, with Rio Tinto’s chief executive spotting an “inflection point”, as copper prices bottom and Chinese demand rises.
Centrica’s share price is down 25% over the past five years, not what you expect from a supposedly defensive utility stock. It has responded like many energy companies, by slashing costs and offloading non-core assets. There are signs of a turnaround, with EPS forecast to rise 7% in 2017. Some investors may have been put off by Centrica’s recent 30% dividend cut but this remains a generous high-yielder, currently paying 5.2%, covered 1.4 times. That is forecast to hit 5.6% at the end of 2017. Trading at 13.5 times earnings it still looks a long-term buy-and-hold for income fans.
Legal matters
Insurance company Legal & General Group (LSE: LGEN) has continued its Brexit fightback, rising almost 30% from its post-referendum trough. It’s been helped by a successful update this week, which showed its retirement division on course to almost double its new business sales in 2016 to £5.4bn, against £2.9bn for 2015. Customer demand for bulk annuities and lifetime mortgages is apparently unaffected by Solvency II regulation, Brexit uncertainty or lower interest rates.
Bulk annuity business is also growing strongly – offsetting slowing individual annuity sales – as is its recently launched lifetime mortgages spin-off, with sales on track to top £500m in 2016. Equity release looks set to be a major growth industry, and L&G is building its position nicely. Despite these promising signs, it trades at just 11.1 times earnings, while yielding a generous 6.1%, covered 1.4 times. EPS growth of 16% this year will slow to 2% in 2017, and Brexit may cause some pain once Article 50 is actually triggered, but L&G is an income seeker’s dream today.
Friends electric
Power giant SSE (LSE: SSE) has trailed the FTSE 100 over five years, growing 20% against 33% for the index as a whole, but most investors buy for its income stream rather than its growth prospects. There have also been concerns on this front, over fears that slowing cash generation could squeeze payouts, although it’s still covered 1.3 times. The yield is certainly holding up, today you get 5.74% from a stock trading at an undemanding 13.2 times earnings.
There’s little sign that SSE will suddenly transform into a growth monster: revenues have bobbed around the £30bn mark for the last five years and forecasts suggest little sign that this is set to change. Instead, dividends have been funded by a disposals programme that is now drawing to a close, as well as debt and share issuance. Management still aims to increase the dividend by RPI, which is currently 1.8%, but SSE needs to generate more cash to meet that pledge. Quibbles aside, SSE looks set to remain an electric dividend stock.
