With interest rates now just 0.25%, dividends are becoming increasingly important to UK investors. That’s likely to be the case over the medium term, since the next interest rate move is likely to be a downward one. And with cash interest rates being less than 1% and inflation rising to 0.6% last month, obtaining a real return from cash is becoming increasingly difficult. That’s where these three income plays could make a major difference to your portfolio.
Provident Financial
The fall in interest rates is good news for Provident Financial (LSE: PFG). The lender will benefit because it will provide a boost to the UK economy. Although unemployment is set to rise and a greater proportion of borrowers are likely to therefore default on their debts, demand for new loans could be supported by a looser monetary policy, which would be good news for Provident Financial’s future outlook.
Clearly, a slowing UK economy poses a risk to Provident Financial’s future, but its valuation offers a wide margin of safety to compensate investors for this. For example, it has a price-to-earnings growth (PEG) ratio of 1.3, which indicates that it offers upside potential. Furthermore, Provident Financial has a yield of 4.6% from a dividend covered 1.3 times by profit. This indicates that it’s highly sustainable at the present level.
Direct Line
Insurance company Direct Line (LSE: DLG) has a yield of 6.6% and offers strong growth potential. Its bottom line is due to rise by 11% in the current year, with an improving outlook for the UK motor market being a key reason for this. The volatile and highly competitive pricing that has been a feature of recent years has faded somewhat and this has allowed Direct Line to benefit from improved trading conditions.
Direct Line’s dividend is expected to be covered 1.2 times by profit in the 2017 financial year. This indicates that there’s growth potential even if Direct Line’s earnings growth stalls. However, it has been able to increase earnings in each of the last three years and this bodes well for its future bottom line performance.
Barclays
Barclays (LSE: BARC) may not appear to be a sound income play. It cut dividends earlier this year to focus on improving its capital position. While dividends per share were expected to be 6.5p next year, they’re now due to be just 3p per share. This puts Barclays on a forward yield of just 1.9%, which is only just over half the FTSE 100’s yield.
However, for long-term investors Barclays dividend cut is a good move. It will strengthen the bank’s financial standing and could allow it to deliver higher and more robust growth over the coming years. Barclays’ payout ratio is expected to be just 17% next year and this indicates that dividend growth could be exceptional in the coming years. Therefore, while the next two years may prove to be disappointing from a purely income perspective, Barclays remains a top-notch long-term income play.
