It is all too easy to become blasé about the absolutely stonking levels of income you can get from top FTSE 100 stocks these days. So let’s put it this way: the following two companies both yield more than 5% a year, over 20 times current base rate. Plus you also get the prospect of capital growth if their share prices do well. So how do the other numbers stack up?
Insurer Legal & General Group (LSE: LGEN) currently yields 5.31%, or 21.2 times base rate, to be precise. This is also 14 times the 0.37% you get on the average easy access savings account. That is a barnstorming return for any saver disillusioned by Bank of England governor Mark Carney’s continuing resistance to hiking rates. If that wasn’t enough, the stock has doubled your money over five years, returning 106%.
Legal & General was hit particularly hard by Brexit, taking a bigger knock than rivals such as is Aviva and Prudential, because of its greater focus on the domestic UK market. While L&G does have a US operation it is still in the early growth phases, and needs a buoyant UK market to thrive.
L&G also has a large stake in the fortunes of UK real estate, while a domestic market slowdown would hit sales of annuities and investments. However, all this has looked less of a worry as initial Brexit fears calm, with its share price up 20% in the last six months. This leaves it trading at a reasonably attractive 13.55 times earnings.
The ageing population, overstretched welfare state and L&G’s significant financial reserves add to the investment case. Forecast earnings per share (EPS) are flat this year but expected to rise 6% in 2018. The dividend is only covered 1.4 times, which is a concern, but the yield is forecast to hit 6% next year. That is 24 times base rate, by the way.
Housebuilder Persimmon (LSE: PSN) also suffered a bad Brexit over concerns about the impact on housing demand. So far, these fears look overblown, and the stock is up 20% in the last six months as investors calm down from their initial tremors.
Over five years Persimmon has grown a whopping 220%, as supply for property far outstrips demand, and low interest rates help to drive prices even higher. Property demand still far outweighs supply, even if prices are slipping in overpriced parts of central and Greater London. Persimmon has just posted 23% underlying pre-tax profits to £782.8m, with operating margins increasing to 25.7% and return on average capital employed rising to 39.4%.
The property market should hold its own while interest rates stay low, as I expect them to do for some years to come. Right now, Persimmon yields 5.1%, healthily covered 1.9 times. It has just announced an additional payment of 25p to be paid on 31 March, on top of the 110p per share special payment announced for 3 July.
Yet it trades at just 10.46 times earnings. This may reflect that EPS growth is forecast to drop by 2% in 2017 (after five successive years of growth in the high-double-digits), although it should then climb 4% in 2018. As house prices continue to rise, Persimmon is unlikely to fall, and that high income should keep flowing.
Prime Minister Theresa May looks set to trigger Article 50 in the next two weeks at which point the Brexit phoney war will stop and the battle for Britain’s future will begin.
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Harvey Jones has no position in any shares mentioned. 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.