The FTSE 100’s dividend yield of around 4% suggests that it could deliver an impressive income return over the long run. Indeed, the index’s current income level is relatively high, and may indicate that it offers good value for money at the present time.
Of course, some of the FTSE 100’s incumbents offer higher yields than the index. National Grid (LSE: NG), for example, has a dividend yield of 6%. This could mean that it’s able to offer stronger total returns than the index over the long run. Alongside a 6.6%-yielding stock that reported positive news on Monday, it could be worth buying for investors who are looking to generate high income returns.
That company in question is Real Estate Investors (LSE: RLE). The Midlands-focused property group released first half results which suggest it continues to benefit from strong operating conditions. Its revenue increased by 4.2% to £7.4m, while underlying profit before tax moved 9.7% higher to £3.4m. Its gross property assets increased by 2.2% to £217.8m, while acquisitions of £7.6m were undertaken during the period. They have the potential to boost its financial performance yet further, having been purchased at a net initial yield of 7.66%.
Although the company has experienced positive trading conditions during the period, it’s nevertheless planning for a challenging year. Given the increasing political uncertainty in the UK, this seems to be a shrewd move. As such, strategic sales, securing £30m of cash and agreed bank facilities, could help the business to capitalise on any downturn in the property market. With Real Estate Investors having a dividend yield of 6.6% at the present time, its total return potential seems to be high over the long term.
The income prospects of National Grid also seem to be relatively impressive. The company is aiming to raise dividends per share by at least as much as inflation over the medium term. Given the potential for the pound to weaken in the coming months as Brexit becomes a reality, this could be a policy from which investors benefit over the medium term. And with dividends being covered 1.2 times, they seem to be highly affordable.
Of course, the company faces regulatory and political risk. As with a number of utility stocks, the threat of more onerous regulations and nationalisation looks set to remain a feature of their outlooks over the next few years. But with such a high yield and a price-to-earnings (P/E) ratio of around 15, it seems as though investors have priced in the risks facing the business.
As such, from a risk/reward perspective, National Grid appears to be worth buying for the long term. The FTSE 100 may offer a relatively high dividend yield, but with the utility company’s income return being 200 basis points higher, it could deliver stronger returns in the long term.
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Peter Stephens owns shares of National Grid. 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.