With the FTSE 100 trading at a relatively high level and inflation set to rise, finding high yielding stocks on low valuations may appear to be challenging. After all, share prices have risen significantly in recent months and investors are becoming more focused on trying to beat inflation this year.
However, there are still companies that offer the potential to deliver high income returns without breaking the bank. Here are two prime examples.
A recovering utility play
Shares in Centrica (LSE: CNA) continue to struggle and have underperformed the FTSE 100 by 12% in the last year. The company’s decision to sell off a number of its oil & gas assets means it may not benefit from the rising oil price as much as many of its industry peers, but its decision to become a more focused domestic energy supplier should mean a more stable and consistent dividend over the medium term.
On the income front, Centrica currently yields 5.6% from a dividend that is covered 1.3 times by profit. This shows its current level of shareholder payouts is sustainable and could increase by as much as inflation over the medium term. In fact, the company’s bottom line is due to rise by 3% this year and by a further 9% in 2018 which could stimulate dividend growth. And with its shares trading on price-to-earnings (P/E) ratio of 13.6, they appear to offer good value for money.
Certainly, there may be challenges for Centrica whilst it implements its ambitious cost saving strategy and refocuses the business towards energy supply. However, with a high yield and a low valuation, it could be a strong performer in 2017.
Rapid growth potential
While Vodafone’s (LSE: VOD) yield of 6.1% marks it out as a highly attractive income stock, the company is also expected to record a rapid rise in earnings. For example, in the current year its bottom line is due to rise by 15%, with further growth of 24% and 27% forecast in financial years 2018 and 2019 respectively.
Part of the reason for such strong growth is the company’s strategy of recent years. It has diversified its product offering, partly through acquisitions, and invested heavily in its infrastructure and the services it offers to customers. For example, it purchased Kabel Deutschland and Spain’s Ono at knockdown prices in recent years. This strategy seems to be working well and with Vodafone trading on a price-to-earnings growth (PEG) ratio of 0.8, it offers growth potential plus a high yield at a very reasonable price.
Perhaps the biggest risk facing the company is the potential fallout from Brexit. Following the decision to sell its stake in Verizon Wireless, Vodafone is now heavily focused on Europe. However, with such a low valuation and a sound strategy, it appears to have a sufficiently wide margin of safety to merit purchase. Therefore, it could prove popular among income, growth and value investors during the course of 2017.
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Peter Stephens owns shares of Centrica and Vodafone. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.