The yields on many properties have declined in recent years. House price growth has been strong, while rental growth has failed to keep up in many parts of the UK. The end result is yields that, in some cases, are disappointing after costs such as management fees and tax are deducted.
By contrast, it is possible to generate a high income return on FTSE 100 shares. In many cases, they also offer improving capital growth potential that could outpace house price growth over the long run.
With that in mind, here are two high-yielding large-cap shares that could be worth buying today in order to generate a generous passive income.
British American Tobacco
British American Tobacco (LSE: BATS) continues to be an unpopular share among investors. Concerns have heightened in recent years regarding regulatory changes to next-generation products, such as e-cigarettes, as well as falling cigarette volumes. Together, it is feared by some investors, this could lead to falling profitability for industry incumbents.
This means that British American Tobacco has a dividend yield of 7.5% at the present time. Its recent results showed that it is making progress in implementing an efficiency strategy, with its operating margin rising by 110 basis points. It is also seeking to reduce debt, which could lower risk and produce a more flexible and nimble business that can more easily respond to changing consumer tastes.
Next-generation products could provide a growth stimulus for the business over the long run. For example, in the current year it is forecasting sales growth of between 30% and 50% for its reduced-risk products. Although it will take many years for them to offset cigarette declines, the potential for this to happen means that the stock could enjoy a sustained recovery over the long run alongside its generous income returns.
Legal & General
The recent performance of Legal & General (LSE: LGEN) has been impressive. For example, the financial services business reported a rise in operating profit of 11% in its most recent half-year results. This is expected to produce a rise in net profit of around 8% in the current year, with the company having growth opportunities across its variety of business areas.
This could lead to rising dividends for shareholders in the coming years. In 2019, it is expected to have a dividend yield of 6.5%. This is around 2 percentage points higher than the FTSE 100’s yield, while a payout ratio of 55% suggests that dividend growth could match, or even beat, earnings growth over the medium term without hurting the financial position of the company.
Legal & General’s price-to-earnings (P/E) ratio of 8.5 shows that it offers a margin of safety should the global economic outlook deteriorate in the short run. In the long run, its total return potential seems to be high relative to its large-cap peers.
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Peter Stephens owns shares of British American Tobacco and Legal & General Group. 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.