With house prices having surged higher in many parts of the UK over the last decade, obtaining a high income return from property has become more challenging. In many cases, rental growth has failed to match price growth. This has led to lower yields across the sector.
As such, buying FTSE 100 income shares could be a better idea. They appear to offer better value for money than buy-to-let property, and could deliver a higher passive income.
Here are two prime examples of FTSE 100 shares that could deliver high total returns in the long run.
The recent trading update from HSBC (LSE: HSBA) was mixed. While some parts of its business performed well despite uncertain operating conditions, other divisions within the bank offered disappointing returns. Among the latter were the bank’s operations in Europe, which could continue to experience a challenging near-term outlook.
HSBC is adapting its strategy to a weaker growth rate in many of its key markets. It continues to offer long-term growth potential from the investment it has made in recent years across major economies in Asia. Rising wages and wealth levels could prompt higher demand for its services in the coming years.
Despite its long-term growth prospects, the bank trades on a price-to-earnings (P/E) ratio of just 10.4. This suggests that investors are maintaining a cautious stance on its prospects due in part to an uncertain outlook for the world economy. It means that the stock has a dividend yield of around 7%. This could make it a highly attractive income share in the long run – especially since it has growth potential in key markets across Asia.
Another FTSE 100 share that offers a high income return is DIY retailer Kingfisher (LSE: KGF). The company’s third-quarter performance was disappointing, with its total sales falling by 3.1% as market conditions in several key markets continue to be challenging.
The company has a new CEO who is set to make changes to its strategy. He will seek to improve its operational performance through investment in areas such as IT and its supply chain. Efforts will also be made to simplify the business. They will allow it to benefit from its scale and to offer a localised product offering.
Looking ahead, Kingfisher is forecast to post growth in its bottom line of just 2% in the current year and next year. Its dividend is covered twice by net profit, and currently amounts to a yield of 5%. While a reduction in its dividend cannot be ruled out due to the difficulties it faces at the present time, it offers the potential to deliver an improving income outlook in the long run. As such, while it trades on a P/E ratio of just 10.7, it could offer investment appeal.
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With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.
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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. 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.