While the interest rates on Cash ISAs may have increased in the last couple of years, the average return is around 1%. That’s well below the rate of inflation, and means that savers are receiving a negative real-terms return on their cash.
By contrast, it is possible to obtain a dividend yield in excess of 5% from these two FTSE 100 shares at the present time.
Although they may experience volatility due to Brexit and the prospect of a global trade war, there is scope for capital growth in the long run. As such, now could be the right time to buy them.
GlaxoSmithKline (LSE: GSK) may have failed to raise its dividends per share in recent years, but the stock still has a dividend yield of around 5%. Furthermore, the changes it is making to its business model could improve its long-term earnings growth outlook. This may mean that it is able to raise dividends at a brisk pace.
The company’s decision to offload a number of its consumer healthcare brands in order to focus on its pharmaceutical operations could provide it with greater focus in what is expected to be a growing industry. An ageing world population, growth in the size of the world’s population and urbanisation are expected to lead to increasing demand across the pharmaceutical industry. This could catalyse the company’s financial prospects and increase its ability to pay a higher dividend.
Since GlaxoSmithKline’s financial performance is less correlated to the wider economy than many of its FTSE 100 peers, it could provide a degree of stability during what may prove to be a volatile period for the world economy. As a result, it may deliver capital growth alongside an impressive income stream.
While GlaxoSmithKline may offer defensive appeal, Sainsbury’s (LSE: SBRY) faces an uncertain future. The retailer’s share price has declined by 44% in the last year, with investors apparently concerned about its prospects following the collapse of its proposed merger with Asda.
Although the supermarket sector is experiencing pressure from increasingly price-conscious consumers, the threat of no-frills operators such as Aldi and Lidl and technological change, Sainsbury’s could deliver a relatively appealing income return. The company has a dividend yield of around 6% from a shareholder payout which is covered 1.9 times by profit. And, with the company’s bottom line due to rise by 4% this year, dividend growth may even be on the agenda.
Certainly, Sainsbury’s could continue its recent share price decline. With a price-to-earnings (P/E) ratio of just 8.5, however, the stock appears to have a wide margin of safety. This could mean that it is able to provide capital growth through a stock price recovery alongside its income return. This could lead to a significantly higher total return when compared to the 1% offered on average by Cash ISAs.
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Peter Stephens owns shares of GlaxoSmithKline. 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.
Motley Fool UK 2019