Two great high-yield stocks that now look even better
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David Stevenson Feb 05, 2010
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Stock markets across the world took a dive yesterday. Fear finally overcame greed as worries about Greece, Europe and US unemployment boiled over. My colleague John Stepek has more on the general slump.
At least there were no nasty surprises – for once – on this side of the Channel. The Bank of England, as expected, kept the base rate on hold. It stays at a mere 0.5%.
That's staggeringly low compared to inflation. Britain's consumer price index (CPI) rose at an annual rate of 2.9% during 2009. It all adds up to pure pain if you're trying to get a return on your savings that can keep up with rising living costs.
And there's no sign of rate rises in the pipeline. Although the CPI is likely to have topped 3% in January, the Bank reckons it will then drop to below the 2% inflation 'target'. So your deposit account won't be paying more interest any time soon.
It's just as well there are still some decent yields on offer right now for income seekers who are willing to risk putting their money into the stock market.
You just need to know which shares to buy...
Why early February is a crucial time for share investors
Early February is a key time of year for share investors. Many big companies update on their recent trading, and give their views on the months ahead. Details of their next dividend payments are often released too.
So if you own, or are looking to buy, shares mainly for a high level of income, this week is crucial. Several of Britain's big dividend payers have just spilled the beans on how things are going. And that can give vital clues about which you should hold.
For example, take the 'big oils', BP and Royal Dutch Shell. Both boast dividend yields of more than 6%. As long as you can take the long-term view, and not lose too much sleep over share prices being volatile, that looks pretty good – assuming the dividend is paid.
Yet this week has thrown up some questions on that score. On Tuesday we outlined some concerns about BP's dividend, and showed a less-than-pretty picture that tells the tale: Just how safe is BP's dividend?
And Royal Dutch Shell just delivered the unwelcome news that fourth-quarter profits had plunged by 76%. That was even worse than had been expected. Shell also admitted that the gap between the money it's bringing in and the cash it's spending was a lot wider than BP's. And although the group has upped its interim payout by 5% compared with last year, it's going to freeze the dividend in 2010's first quarter.
That's not too promising. Now, just to make things clear, while oil prices stay above $60 a barrel, we don't expect either company to cut its dividends. So if you already hold them, there's no need to sell. But it's important to be aware of the dangers. And with both stocks now trading well off their lows, we also believe there are better options around.
That takes us back to the other companies that reported this week. There are two which are saying much more what we want to hear. Better yet, both offer solid dividend yields.
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A drug giant that will provide a great income
First there's drug giant GlaxoSmithKline (LSE: GSK). Many investors have been fretting about the company, because several of its drugs are coming 'off patent' soon. That's bad news for profits because it means that rivals can then produce cheaper copies.
Yet we've been of the view that this is now factored into the share price. What's more, with its strong cash flow and low valuation - the forward p/e is just 9.7 - Glaxo is cheap.
And yesterday's news confirmed that view. Fourth-quarter sales rose by 17% while pre-tax profits jumped by over 60%. That meant that 2009's full-year pre-tax profits were up 16% on 2008, better-than-expected. Also, Glaxo is staying on top of its costs. It will halt some of its most expensive research and development plans, and aims to "squeeze more products out of its laboratories", says Trista Kelly at Bloomberg.
Further, the company has steadily upped its payout by more than 5% each year over the last decade. The total dividend for 2009 has just been increased by 7%. On a prospective yield of 5.3%, at 1,206p Glaxo is one great income share to add to your portfolio.
A FTSE 100 heavyweight set to out-run the market for some time yet
Then there's Vodafone (LSE: VOD), FTSE 100 heavyweight and the world's largest mobile phone firm. Yesterday it served up a similar story to Glaxo – increasing sales (up a more-than-forecast 10%), but lower spending on equipment, and also job cuts.
Again, the market has been fearful that demand for telecoms services was slowing. But Vodafone's been doing the right things. Last November it said that its £1bn cost reduction plan was a year ahead of schedule, and that an extra £1bn of expenses would be lopped off by 2012. Now it's saying that it will have more cash at end-March 2010 than it had thought, while profits should also be better than expected.
Good stuff. We've been keen on the stock since last August. Since then it's up 6%, which is a 1.5% out-performance of the FTSE All-Share index.
But at 139p, on a forward p/e of just over 9, Vodafone is easily cheap enough to out-run the market a lot more. And on a prospective yield of 5.8%, it's a cracking income generator.
Our recommended article for today
Stock markets took a dive yesterday as fears over Greece and US unemployment finally boiled over. How far will they fall, and what does it mean for your investments? John Stepek takes a look.
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