The best Cash ISA on the market at the moment offers an interest rate of less than 1.5%. That’s pitifully low, especially after factoring in inflation. The real, or after-inflation rate of interest is more like -0.5%.
Luckily, this isn’t the only option investors have. The FTSE 100 is full of blue-chip income stocks that offer much higher rates of return and, today, I’m going to highlight just two of these companies.
The first company on my income watchlist is homebuilder Taylor Wimpey (LSE: TW). The sector has attracted a lot of flak recently due to their fat profit margins and deteriorating quality of the properties they are passing on to customers.
These concerns are valid, but the fact of the matter is that the UK housing market is structurally undersupplied. This means companies like Taylor Wimpey are a necessary evil, and it’s unlikely they’ll be going anywhere any time soon.
With that being the case, if you’re looking for a top-quality income investment, I highly recommend spending some time researching this market leader. During the first half of 2019, the company completed 6,541 homes, up from 6,497 in the first half. However, due to higher operating costs, operating and net profits declined by 9.4% and 1%, respectively, year-on-year. Still, cash generation remained strong, and this is why I’m recommending the stock as a dividend investment.
It ended the first half with a net cash balance of £392m, and management is planning to return virtually all of this capital to investors. TW is planning to distribute a total of £610m in 2020, 18.6p per share. Based on the company’s current share price, this implies investors are in line or a dividend yield of 12.3% next year. In my opinion, that level of income is too good to pass up.
The other FTSE 100 income stock I have my eye on is also a homebuilder. Persimmon (LSE: PSN) has been subject to more criticism than all of its peers combined. Nevertheless, management is trying to work things out by investing profits back into the business to improve quality.
Analysts at City broker Jefferies believe these efforts are already having an impact on the business and its relations with customers, one of the reasons why they recently recommended the stock. On top of this, the tailwind from the UK’s housing market situation is also helping Persimmon.
After nearly collapsing in the financial crisis, Persimmon’s management has adopted a policy of returning as much capital to investors as possible. Based on the company’s own current timeline, it’s scheduled to return 236p per share to investors for 2019, giving a dividend yield of 11.7%. Analysts believe the firm will pay out a similar amount next year.
Not only does the stock offer a market-beating dividend yield, but it also trades at a deeply discounted multiple of just 7.5 times forward earnings.
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Rupert Hargreaves owns no share mentioned. 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.
Motley Fool UK 2019