Finding income stocks which are cheap seems to be getting more difficult. With the FTSE 100 trading close to an all-time high and investors now more mindful of inflation, shares with high yields are seeing their prices rise in many cases. While this is to be expected, there are still a number of stocks which offer a mix of high yields and low valuations. Here are two companies which appear to fall neatly into that bracket.
Reporting half-year results on Tuesday was housebuilder Taylor Wimpey (LSE: TW). Its performance in the first half of the year was strong, with the company experiencing no reduction in demand following the general election. This is somewhat surprising, since the outlook for the UK economy is arguably more uncertain now than it has been for a number of years.
Despite this, the company reported that confidence levels and market dynamics are as robust as ever. Its completions increased by 9.3% versus the same period of last year, while there was a 6.3% increase in the average selling price. With mortgage rates likely to remain low over the coming years and demand for housing being well in excess of supply, it would be unsurprising for Taylor Wimpey to record growth in completions and selling prices in future years.
With the company announcing a special dividend of 10.4p per share which will be paid in June 2018, its income prospects remain bright. It currently yields around 6.8%, which is one of the highest yields in the FTSE 100 at the present time. However, it has a price-to-earnings (P/E) ratio of just 10.3 and this signifies that it could offer considerable capital growth over the medium term.
Also offering a mix of a high yield and low valuation is J Sainsbury (LSE: SBRY). The company faces a difficult future because consumer spending may come under a degree of pressure in future months. Inflation is now higher than wage growth, and this may mean competition within the supermarket sector increases.
However, Sainsbury’s is in the process of integrating its recently-acquired Argos business. It is opening Argos franchises inside its supermarkets, and this could create significant cross-selling opportunities. Furthermore, synergies from the two businesses may lead to improved margins and profitability. This could help support the company’s dividend.
Sainsbury’s currently yields 4.1% from a dividend which is covered around twice by profit. This suggests that dividends could increase in future years – even if the company’s profitability comes under pressure. And since the stock has a P/E of 11.3, it appears to offer a wide margin of safety to new investors.
Certainly, there are more stable and reliable income stocks available within the FTSE 100. The retail sector may experience an even more difficult year in 2018 than in 2017, owing to higher forecast inflation. However, with a low valuation, Sainsbury’s continues to offer a relatively attractive route to a strong income return in the long run.
Peter Stephens owns shares of Sainsbury (J) and Taylor Wimpey. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.