Saving in cash is easy and cheap. But it will probably also make you poorer.
At the time of writing, the best instant-access cash ISA I can find pays 1.44%. With UK inflation currently running at 2.1%, this means the real value of your savings will fall each year.
I’m not happy with this. Although I keep a cash fund in reserve, I prefer to invest my spare income in FTSE 100 dividend stocks.
In this article, I’m going to steer away from the riskier 7%+ yields on offer in today’s market. History suggests that dividend cuts are more likely at this level.
Instead, I’m going to focus on two stocks with forecast yields of about 5%. I reckon these shares could be good picks for income investors.
Wm Morrison Supermarkets (LSE: MRW) is the top riser in the FTSE 100 today, after a strong set of results.
The Morrisons share price has risen by 3% following news that adjusted pre-tax profits rose by 5.3% to £198m during the first half of the year. This looks like a solid achievement to me, given that sales only rose by a wafer-thin 0.4% to £8,831m.
I was also pleased to see that these profits were backed by free cash flow, which rose by £30m to £211m. Good cash conversion is extremely important for income investors, and this an area where Morrisons consistently scores well, in my opinion.
Its recent decision to cut prices on “hundreds” of popular items suggests the supermarket price war is continuing. To help offset these pressures, the group is working with a number of partners.
The existing home delivery partnership with Amazon is being extended to include new cities this year. The two companies also say they are looking for other new opportunities to “improve the shopping experience”.
Wholesale is another area of growth. Morrisons already supplies hundreds of convenience stores and garage forecourt shops. It’s now added an export deal to its portfolio, with an agreement to supply a Middle Eastern supermarket group with more than 150 stores.
I don’t expect Morrisons to become an exciting growth stock. But I do think that it’s an attractive pick for investors seeking a reliable income. With a forecast yield of 5% for the current year, I’d be a buyer.
A value buy?
Another income stock I’d be happy to add to my portfolio is RSA Insurance Group (LSE: RSA). This insurer had a difficult time in 2018, but, the dividend still rose by an inflation-beating 7% last year, to 21p per share.
RSA’s recent half-year results suggest the business is getting back on track. The figures suggest to me that many of the problem areas of the business have been sold, leaving a more profitable core.
For example, underlying operating profit excluding disposals rose by £4m to £308m. Including disposals, it fell to £280m. Profitability has also improved as a result of these sales.
If these improvements are sustainable, then my view is that chief executive Stephen Hester is reshaping the firm to be more robust and profitable than it’s been in the past.
Broker forecasts for the year price the stock on 12.6 times forecast earnings, with a prospective yield of 4.9%. I see this as a good starting point for an income investment.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. 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.