Dividend yields have always been important to income investors. However, in 2018 they may become of even greater importance. Inflation has gradually climbed to 3.1%, with Brexit being a key reason. As the date of the UK leaving the EU draws closer, uncertainty may build and force inflation higher. With the Bank of England concerned about growth prospects, there may be a lack of monetary policy tightening to help curb the rising price levels.
As such, buying these two higher-yielding stocks could be a shrewd move. They may deliver real income returns even if inflation soars.
Reporting on Thursday was online gaming entertainment and solutions provider 888 Holdings (LSE: 888). The company announced a positive trading update, with it expecting adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to be in line with forecasts. This has been achieved despite the increased regulatory focus which has been prevalent in the UK. It has also been delivered even though the company has chosen to exit from five markets in the first half of the year.
There has been strong progress in the company’s Casino business, while there has also been encouraging momentum in 888Sport. Furthermore, the company has reported increased activity on mobile devices, as well as continued expansion in regulated Continental European markets such as Italy and Spain.
With a dividend yield of 4.2%, 888 appears to have income appeal at the present time. Its dividends are covered 1.2 times by profit, which suggests they are sustainable at their current level. With earnings due to rise by 6% this year and by a further 12% next year, dividend growth could be high. Therefore, while not a defensive share, the stock could be a worthwhile income play for the long term.
Also offering a positive outlook for income investors is motor insurance specialist Admiral (LSE: ADM). The company currently has a dividend yield of 5.6%. This includes special dividends and while there is no certainty that such dividends will continue in the long run, the company has a good track record of paying them each year. Therefore, there seems to be a high chance that they will continue to be paid in future years.
With Admiral occupying a dominant position within various niches in the motor insurance segment, such as young drivers and high-performance cars, it could deliver relatively stable earnings growth in the long run. For example, in the next financial year it is expected to post a rise in its bottom line of 3%. This puts it on a forward price-to-earnings (P/E) ratio of 16.6, which suggests that it offers a margin of safety.
Certainly, the motor insurance industry has experienced a degree of turbulence in recent years. The changes to the Ogden discount rate used to calculate payouts for personal injury claims caused share prices across the sector to decline. However, with such costs simply being passed to consumers in the form of higher prices in most cases, the sector appears to be a sound place to invest for the long run.
Peter Stephens owns shares in Admiral. 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.