Buying into stocks with above-average dividend yields could be a shrewd move. Not only could they help protect you against higher inflation, they may also offer some defence if stock market volatility continues. As such, their total returns could be relatively impressive.
Of course, with the FTSE 100 trading at well over 7,000 points, there may be a limited choice on offer for investors seeking good value income shares. Margins of safety may be less enticing than they once were, but with a potent mix of dividend growth and high yields, these two shares could be worthy of a closer look right now.
Reporting on Tuesday was power station operator Drax (LSE: DRX). The company’s performance in 2017 showed a marked improvement versus the prior year, with EBITDA (earnings before interest, tax, depreciation and amortisation) rising by 64% to £229m. All parts of the business delivered growth, which is encouraging for its future potential.
The company continues to deliver on its strategy and remains on target to reach more than £425m in EBITDA by 2025. Its energy supply growth has accelerated due to the acquisition of Opus Energy. It has also increased biomass self-supply through acquisitions and the commissioning of a third biomass pellet plant.
With the UK undergoing an energy revolution, the prospects for Drax appear to be bright. It looks set to deliver significant amounts of profitability in the coming years which could be used to pay its investors a higher dividend. And with the company yielding 5.7% in the current year, it looks set to offer a significant income stream for its shareholders.
Also offering the prospect of impressive dividend performance is water company United Utilities (LSE: UU). The company’s shares have been relatively unpopular among investors in recent months. Political risk remains high, while regulatory concerns have also contributed to a 30% fall in the stock’s price in the last year.
The fall in valuation means it now has a dividend yield of over 6%. This is historically exceptionally high and suggests that there’s a wide margin of safety on offer. Furthermore, with dividend growth set to remain ahead of inflation over the medium term, the stock could prove to be valuable for investors who are concerned about the potential impact of higher inflation on their income.
With United Utilities having an uncertain future, now could be a worthwhile buying opportunity for long term investors. Certainly there are risks associated with the stock and its share price performance could suffer yet further if investors remain focused on cyclicals rather than defensive stocks. But with such a high dividend yield, these risks appear to have been factored in by investors. As such, its risk/reward ratio appears to be highly favourable at the present time.
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Peter Stephens owns shares in United Utilities. 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.