The uncertain outlook for the UK economy could mean that interest rates remain at a low level for some time. In fact, there are rumours that the next move for interest rates could be downwards, with the Bank of England apparently becoming increasingly dovish as the prospects for the world economy remain challenging.
This could mean that dividend stocks offer increasingly appealing outlooks when compared to other mainstream assets. As such, now could be the right time to buy these two FTSE 100 income shares. They may deliver high income returns, as well as capital growth, over the long run.
The outlook for GSK (LSE: GSK) and the wider pharmaceuticals industry could improve significantly over the long run. Demand for healthcare-related products and services may rise due to an ageing global population, which could mean that the company’s decision to focus on its pharmaceutical operations leads to an improving rate of profit growth.
However, an improving financial outlook may take time to achieve. In the current year, GSK is forecast to post a fall in earnings of 3%, while growth of 2% in the next financial year may mean that investors struggle to become increasingly bullish about the stock from a growth perspective over the near term.
Of course, its defensive characteristics may boost its appeal in the short run. GSK’s lack of dependence on the wider economy for its growth could lead to increasing demand among investors who could become increasingly risk-averse. Since it offers a dividend yield of around 4.6%, its total returns may therefore be highly attractive.
As such, now could be a good time to buy the stock, with its income prospects, defensive appeal and long-term growth potential suggesting that it may outperform the FTSE 100.
Unlike GSK, FTSE 100 index peer Rio Tinto (LSE: RIO) lacks defensive appeal. Its financial performance is closely linked to the prospects for the world economy. Since there are concerns surrounding the outlook for China due in part to the global trade war, it would be unsurprising for the stock’s valuation to come under a degree of pressure in the near term.
However, Rio Tinto’s current valuation suggests that investors may have factored in many of the risks facing the business. It currently trades on a price-to-earnings (P/E) ratio of just 8, which indicates that it has a wide margin of safety. With the company having a relatively low level of gearing, it could prove to be more resilient than some of its sector peers should the performance of the world economy disappoint.
The stock’s dividend yield of 6.9% suggests that it could offer income investing potential over the long run. While there may be more stable income opportunities elsewhere in the FTSE 100, the iron ore miner may be able to produce a high overall return for patient investors.
Peter Stephens owns shares of GlaxoSmithKline and Rio Tinto. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.