With inflation falling to zero in March, a reduction in UK interest rates seems to be more likely than a rise over the short to medium term. And, with the rate on cash savings already being little more than 1.5%, returns are very poor for savers at the present time.
Dividend Stocks
One potential solution, of course, is high-yield stocks. For example, the likes of National Grid (LSE: NG) and Direct Line (LSE: DLG) currently offer yields of 5.1% and 5% respectively, which is clearly more appealing than the rate on cash savings. In addition to this yield, though, both companies have considerable headroom when making their dividend payments and, when it comes to the sustainability of dividends, that could prove to be crucial.
So, with a dividend coverage ratio of 1.3, National Grid appears to be a sound long term dividend stock – especially since its business model is highly stable. Meanwhile, Direct Line is expected to have a dividend coverage ratio of 1.6 next year, which is necessarily higher than that of National Grid due to its business model being less consistent and less robust.
Growth Potential
In addition to a great yield, stocks such as Hammerson (LSE: HMSO) also offer strong growth potential. In fact, with the UK economy set to improve significantly over the next couple of years, with unemployment falling and GDP growth being among the highest in the developed world, Hammerson’s bottom line is forecast to grow by 9% this year, and by a further 8% next year. And, with Hammerson currently having a forward yield of 3.5% and posting annualised dividend per share growth of 6.5% over the last five years, it appears to be a very sound income bet.
Super Yield
Of course, there are other stocks that offer stunning headline yields, but which come with greater risk. One notable example is Admiral (LSE: ADM), which is forecast to yield a whopping 6% next year. That’s among the highest yields in the FTSE 100 and shows that a return of four times that of savings is very achievable even when the FTSE 100 is at a record high. Clearly, Admiral is enduring a challenging period, with its bottom line due to fall by 12% this year before rising by 7% next year.
As such, and while further volatility should be expected, it remains a top notch income play that, alongside National Grid, Direct Line and Hammerson, could make a real difference to your income over the medium to long term.
