With house prices having surged higher over the last decade in many parts of the UK, obtaining a high income return has become increasingly challenging.
By contrast, a number of FTSE 100 shares continue to offer yields significantly higher than inflation. When purchased through a Stocks and Shares ISA, their net returns may prove to be higher than a buy-to-let as a result of the latter’s decreasingly efficient tax treatment following government changes in recent years.
With that in mind, here are two FTSE 100 stocks that could deliver high income returns in the long run. As such, they could be worth buying right now.
The utility sector was previously viewed as a defensive industry from which investors could generate a high and resilient yield. That situation has changed somewhat in recent years, with investor sentiment towards companies such as National Grid (LSE: NG) having shifted to one of increasing caution.
The key reasons for this appear to be the political uncertainty which surrounds the UK at the present time, as well as regulatory changes for the industry. Investors seem to be pricing in a challenging period, with National Grid’s dividend yield currently standing at 5.7%.
This is high relative to its historic level, and suggests investors are also pricing in a margin of safety that could mean the company’s risk/reward ratio is more appealing than it has been in the past.
Of course, National Grid’s shares could lag the FTSE 100 if political and regulatory concerns become more serious. But with a solid history of paying rising dividends, as well as a high yield, its total return potential is relatively appealing on a long-term basis.
Another FTSE 100 share that could produce a higher income return than a buy-to-let property is insurance business Direct Line (LSE: DLG). The company currently yields around 10%, which is more than twice the income return of the wider index.
Of course, recent results were somewhat mixed. Although its operating profit declined versus the first half of the prior year, the company is making progress in reducing costs. This could produce a more efficient business that’s better able to deliver dividend growth for its investors.
Direct Line is also seeking to become more competitive versus industry peers through investment in its digital capabilities. This is aimed at increasing its differentiation, as well as allowing it to become more flexible in order to capitalise on future growth opportunities.
Therefore, while the company is experiencing a period of change that may mean there’s an element of uncertainty ahead, its income potential and the prospects of becoming a stronger entity in the long run could mean it’s currently a better buy than a property.
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Peter Stephens 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.