While the rate of inflation has fallen to 2.7%, it has the potential to remain a threat to investors. Brexit talks may be progressing at a faster pace than had been expected, but there is still only a relatively short period of time ahead in which to deliver solutions to complex challenges. Therefore, a weakening of the pound and a higher rate of inflation could be on the horizon.
Given the relatively high dividend yields that are on offer among a wide range of FTSE 100 income stocks, now could be a good time to invest. Here are two income stocks that may be worth a closer look at the moment.
With Brexit talks seemingly making progress according to recent reports, inflation may fail to rise in the short run. However, expectations for a deal regarding Brexit may be overly-optimistic, given some of the issues involved. For instance, the Irish border question does not yet seem to have a clear solution. While technology may help to some extent, ultimately there could be a period of disruption ahead which could weaken the pound.
This could cause uncertainty regarding the UK’s economic future to increase. Alongside this, interest rate rises are likely to be very limited and may not have a sizeable impact on changes in the price level. Even if they do have a direct impact, time lags mean that they may not be felt until the UK has left the EU in a year’s time.
While the stock market is higher than it was five years ago, it has only gained 10% during that time. Therefore, with a number of FTSE 100 companies seeing their financial performance improve in what has been an increasingly favourable global economy, their dividend yields have generally risen. It is now possible to obtain a 4% dividend yield from around a third of the FTSE 100’s constituents, which means it could be a buyer’s market when it comes to income investing.
It is now possible to obtain a 4% dividend yield from around a third of the FTSE 100’s constituents.
Two stocks which could therefore be worth a closer look for the long term are Aviva (LON:AV.) and Vodafone (LON:VOD). They have dividend yields of 5.5% and 6.7% respectively. Both companies experienced difficult periods in the few years following the financial crisis, but now seem to offer improving financial performance.
Aviva recently announced that it has excess capital of around £2 billion. Around £500 million of this amount is due to be returned to shareholders, with the company expected to increase dividends per share by 20% during the next two years. Since it now has a restructured business which could benefit from debt reduction and acquisition activity through the remainder of its excess capital, it could offer relatively strong performance.
Likewise, Vodafone has invested heavily in its business in recent years. Acquisitions have also helped to diversify its operations, while a gradual shift towards new product categories may also improve its financial outlook. With the company forecast to post a rise in EPS of 10% next year and 22% in the year after, it would be unsurprising if investor sentiment improved. A prospective P/E ratio of 16 suggests it may not be overvalued.
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