Since the State Pension is unlikely to be sufficient for most people to live off in older age, generating a second income in retirement may become an increasingly pressing requirement.
Fortunately, the FTSE 100 currently has a relatively high dividend yield of 4.5%. However, a number of its members provide significantly higher income returns at the present time that could make them worthwhile purchases for income-seeking investors.
Here are two prime examples that appear to offer dividend investing appeal, as well as relatively low valuations that suggest capital growth may be ahead.
SSE (LSE: SSE) released an encouraging trading statement on Thursday that showed it is on track to meet its financial guidance for the current year. Although it has recorded lower-than-forecast renewable energy output in the first part of its financial year, it remains well-placed to meet its dividend payment plan in the current year, as well as over the medium term.
As such, it is set to yield 6.9% in the current year. It may also be able to deliver inflation-beating dividend growth over the coming years that could make it an increasingly appealing income opportunity.
With the UK set to become the first major economy to have net zero emissions by 2050, SSE’s pivot towards renewable energy could provide it with a tailwind over the long run. While political and regulatory risks remain in the near term, and operational issues could hold back investor sentiment to some degree, its long-term potential as an income share seems to be relatively high.
While GlaxoSmithKline (LSE: GSK) is currently undergoing a period of significant change, the long-term prospects for the business continue to be bright from an income investing perspective. It is shifting its focus towards pharmaceuticals, with it having engaged in M&A activity in recent months alongside the disposal of key consumer brands.
This could help to make the business more focused and increasingly efficient, while the performance of the pharmaceuticals industry may be less closely correlated to the wider economy. This could help to make the stock more appealing during periods of economic turbulence, which could be relevant at the present time due to the prospect of a global trade war.
Since GlaxoSmithKline currently has a dividend yield of 4.9%, it has a higher income return than the FTSE 100. However, its long-term appeal may be in its ability to raise dividends in a robust fashion, with it currently having a dividend coverage ratio of 1.5. This suggests that after a period that has lacked dividend growth, it may be in a position to reward shareholders to a greater degree.
As such, now could be an opportune moment to buy a slice of the business. With a refreshed growth strategy and a price-to-earnings (P/E) ratio of 14.3, its total return potential seems to be high relative to the wider FTSE 100.
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Peter Stephens owns shares of GlaxoSmithKline and SSE. 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