The FTSE 100 index’s 20% rise over the past year means that it now yields just 3.3%. This may seem relatively unappealing to some investors in an era where inflation is rapidly rising.
Of course, it is possible to obtain a higher income return from some FTSE 100 stocks. Indeed, shares in Aviva (LON: AV) and Taylor Wimpey (LON: TW) offer forward dividend yields of 5.5% and 5.6%, respectively. And they could offer long-term investment potential when their strategies, valuations and sector outlooks are taken into account.
Housebuilder Taylor Wimpey’s dividend appears to be relatively affordable. For example, in the current financial year it is forecast to pay 9p in dividends per share fromearnings per share of 15p. This works out as dividend cover of 1.7 times.
The company’s recent performance showed that it is making a strong recovery from disruption caused by the pandemic − the firm’s completions in the first half of its 2021 financial year were 2.6 times those from the same period of the prior year.
Long-term growth in Taylor Wimpey’s dividend may be catalysed by continued low interest rates that make homes relatively affordable. Similarly, government support to the sector through policies such as ‘Help to Buy’ may create persistently upbeat operating conditions for housebuilders. In addition, an ongoing undersupply of housing may mean the imbalance between demand and supply remains significant.
But the company could experience a more challenging near-term future than its recent past. The housing market has been aided by the stamp-duty holiday, which is now at an end. Also, risks such as supply-chain issues that dampen economic growth and the ongoing threat posed by Covid-19 could limit demand for the firm’s new homes.
However, Taylor Wimpey has a forward price-earnings (P/E) ratio of just 11. This indicates it offers a margin of safety that could provide scope for capital growth alongside its generous income return.
Aviva’s dividend also appears to be relatively affordable. In the current financial year, it is forecast to pay dividends per share totalling 22p from earnings per share of 54p. This equates to dividend cover of 2.5 times. In addition, it plans to return at least £4bn to shareholders by the end of the first half of 2022. This process will commence with a £750m share buyback scheme.
The firm’s recent interim results showed that it is making progress in delivering its simplification strategy. This entails making disposals of non-core business units and focusing capital on regions and business lines where the company has a competitive advantage. It is also on track to deliver its target to reduce costs by £300m in the 2022 financial year.
Clearly, ongoing uncertainty in the global economic outlook could weigh on Aviva’s short-term share price prospects. Similarly, accelerated changes to its business model may lead to difficulties as it seeks to pivot towards faster-growing markets.
However, Aviva’s shares currently trade on a forward P/E ratio of 7.5. This suggests it offers good value for money relative to the wider FTSE 100 index. With annualised dividend growth of 9% forecast over the next two years, it could prove to be a worthwhile long-term income and capital growth opportunity.