The average variable-rate cash ISA currently pays just 0.86%, according to Savings Champion. If you’re prepared to lock your money away for five years, you can push that up to 1.95%, which I suppose is something.
On the grid
However, it’s a paltry return with a host of top FTSE 100 stocks currently yielding more than 5% or 6% a year, and thanks to recent stock market turbulence, many are trading at discounted valuations as well.
Pipes and wires transmissions giant National Grid (LSE: NG) is one of the most popular income stocks on the blue-chip index. The £26bn company operates in the traditionally defensive utility sector with interests in both the UK and US.
However, that has not prevented it from suffering along with the rest of the FTSE 100, its share price falling 9.5% in the last year to 773p. That may put some people off, but others may see this as a buying opportunity as it now trades at a tempting valuation of just 13.6 times earnings, below the 15 mark traditionally seen as fair value.
There are company specific reasons why its stock has fallen. Just before Christmas, electricity regulator Ofgem proposed price controls for networks in a bid to save consumers £6.5bn, a move that left National Grid “disappointed”. It plans to halve the baseline cost of equity returns to 4%, to help consumers benefit from low interest rates, but this could squeeze National Grid’s ability to pay dividends, the main reason people hold its shares.
Payouts could come under pressure after the new system kicks in from 2021. As with every stock, there’s something to worry about. However, the forecast dividend is currently a generous 6.2%, while revenues are expected to grow slowly but steadily, and it remains one of three dividend stocks favoured by Kevin Godbold.
Direct Line Insurance Group (LSE: DLG) is an overlooked FTSE 100 stock also worth highlighting, especially now, as it offers a forecast yield of 8.5%. By the end of next year, that’s forecast to hit 9%. A sky-high yield is often a sign of a company in trouble and its stock has endured a difficult year, dropping almost 14% to 318p in the last 12 months, faster than the FTSE 100 as a whole.
Feeling the cold
Direct Line has retained a loyal own-brand customer base which has partly shielded it from the comparison site melee. But sales have been hit by the loss of major partnerships with Nationwide and Sainsbury’s, and a rise in weather-related claims after last winter’s cold spell.
Revenue growth has also flattened. In 2014, it earned £3.14bn, a figure that’s forecast to be slightly lower five years later at £3.07bn for 2019. However, return on capital employed remains healthy at 21.9%, as are forecast operating margins of 16.9%.
Again, we have a potential buying opportunity here, with the stock trading at just 10.9 times forecast earnings. That dizzying dividend only has cover of 1.1, but doesn’t seem threatened for now. Even if it is trimmed, the yield would still beat anything you are likely to get from a cash ISA.
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harveyj has no position in any of the shares mentioned. 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.