Building a retirement nest egg from age 40 is a very achievable goal. Not only can compounding have a significant impact on a retirement portfolio over a 20-plus year time period, the FTSE 100 appears to offer a number of undervalued income shares at present.
Buying a range of them today could be a shrewd move that ultimately produces improving financial prospects in older age. Here are two such companies that, while facing uncertain near-term outlooks, could deliver improving income returns in the long run.
BT’s (LSE: BT.A) recent half-year results showed it’s making progress in delivering its strategy. For example, the telecoms giant launched a variety of new products for consumers and businesses which could strengthen its offering and improve its competitiveness. It’s also delivering on its modernisation strategy that will produce up to £1.1bn in transformation benefits, while investing in 5G services.
Certainly, its financial performance continues to be somewhat disappointing. Revenue declined by 1% in the first half of the current year, while its profitability is expected to fall modestly in the current year and rise by just 2% next year. This may mean investors are underwhelmed in the short run.
However, with a dividend yield of 7.7%, which is expected to be covered 1.6 times by net profit in the current year, BT could offer income investing appeal. Furthermore, trading on a price-to-earnings (P/E) ratio of just 8, investors appear to be downbeat about its prospects. This may mean there’s a margin of safety on offer that improves the stock’s risk/reward ratio and makes it a worthwhile long-term buy within a diverse portfolio of companies.
St. James’s Place
Wealth management business St. James’s Place (LSE: STJ) could also offer income investing potential. The company’s recent quarterly update highlighted an increase in its funds under management of 7.7% compared to the same period of the previous year.
Looking ahead, the company’s performance could be negatively impacted by an uncertain outlook for the global economy. This may cause a slowdown in discretionary investment flows in the near term, with a global trade war and Brexit having the potential to reduce its growth rate. However, St. James’s Place has a strong position within its wider market that could produce improving performance in the long run.
The stock currently yields around 4.6%, with its dividends per share having more than doubled over the last four years. A similar pace of growth may not be achievable in the next four years, given the uncertain outlook for the world economy. However, the company has a solid track record of delivering rising profitability which may mean its total returns are relatively impressive over the long run.
As such, buying a slice of it could improve your portfolio returns and boost your retirement prospects over the coming years.
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Peter Stephens has no position in any of the shares 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