What can you do with 1.36% interest per year? Not much, I’d suggest, unless you’re already so rich that you don’t need to be reading this article.
Unfortunately, 1.36% is the top easy access Cash ISA rate available today, according to my research. For savers with a £10k pot, that means an income of just £136 each year.
Although I keep some savings in cash for a rainy day, low interest rates mean I prefer to invest most of my cash in FTSE 100 dividend stocks. Today, I want to look at two shares from my own portfolio with dividend yields of more than 6%.
I’ve bought this bank
The Royal Bank of Scotland Group (LSE: RBS) share price has risen by more than 25% from this summer’s lows of 177p. Critics point out that RBS (like most rivals) is struggling to maintain its profit margins in the face of tough competition and ultra-low interest rates.
There’s some truth in this, but the reality is that banks are still making money. Just not as much money as they were making before the financial crisis. RBS is expected to report a profit of £3.2bn this year, for example.
The advantage of this more conservative approach is that the bank’s balance sheet looks much stronger to me these days. I can’t see the business running into serious problems again in the foreseeable future.
I’m also confident the essential nature of banking means these financial giants will eventually figure out how to improve their profitability. Interest rates may also rise one day, which would provide an overnight boost to profit margins.
I’ve held RBS shares for a while now, as I believe they offer good value and are likely to be a reliable source of income. This stock continues to trade at a discount to book value and offers a 2020 forecast yield of 6.7%. At this level, I’m happy to collect my dividends and wait patiently for more favourable market conditions.
This market leader could bounce back
British Gas owner Centrica (LSE: CNA) has had a lot of bad press in recent years. Although I think claims of profiteering are wide of the mark, it’s certainly true that many energy customers have left to take advantage of cheaper tariffs elsewhere.
However, I believe the tide may be starting to turn. Firstly, a number of smaller energy suppliers have gone bust recently due to their flimsy business models. I think this is unlikely to happen to British Gas, whose prices may now start to seem more competitive.
Secondly, Centrica is reporting strong customer growth in “services and home solutions.” This includes products such as boiler servicing, as well as smart products like Hive which allow you to control and monitor your home from your smartphone. The number of customers taking such services rose by 243,000 in the four months to October, offsetting a 107,000 reduction in energy customer accounts.
This stock is not without risk — especially political risk. But analysts expect the group’s profits to start recovering next year and have pencilled in a 38% increase in earnings. That prices the stock on 8.3 times 2020 forecast earnings, with a dividend yield of 6.4%. I think Centrica could offer decent value at this level.
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Roland Head owns shares of Centrica and Royal Bank of Scotland 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.
Motley Fool UK 2019