Income-generating stocks have been the big story in 2016 and that’s unlikely to change in 2017. The FTSE 100 now yields a fruity and juicy 3.83%, against a thin and watery average of 0.39% on easy-access cash, according to MoneyFacts. The following three companies pay watermelon-sized yields of around 7%, or 28 times base rate. Should you take a bite?
Full house
Housebuilder Berkeley Group Holdings (LSE: BKG) yields a towering 7.08%, the largest on the FTSE 100. It has also been a dream growth stock, up 123% over five years, against 23% on the FTSE 100. The last year has been tough but the share price has recovered in recent weeks, helped by healthy interims that saw six-monthly profits before tax rising 34% year-on-year to £393m, although reservations fell 20%.
The big concern is the London property market, with prime central prices slipping as stamp duty changes and Brexit uncertainty cools foreign buyers’ ardour. Expect more of this next year after Prime Minister Theresa May triggers Article 50. Today’s valuation of 10.57 times earnings (up from 7.1 times in just two weeks) suggests that some of this has been priced-in. Berkeley’s earnings per share (EPS) are forecast to dip slightly in the year to 30 April 2018. The income looks reasonably solid – cover is 1.4 – but the share price could be in for a volatile year.
Should you invest £1,000 in Berkeley Group right now?
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Petrol head
Oil major BP (LSE: BP) has one number in its favour right now: it currently yields 6.7%, the second highest on the FTSE 100. Worryingly, cover is now -0.9%, which means BP is using debt to fund its dividend.
All hopes now rest on the oil price, in the wake of the OPEC and non-OPEC production cuts, which should come into force in January. The subsequent price surge has stalled, with Brent crude now reversing to around $54, as critics question whether oil producers will deliver on the deal. Another hurdle is the accelerating US shale rig count, as drillers hedge in today’s higher prices. BP’s EPS are forecast to rise a whopping 120% next year, helped by the company’s cost-cutting programme, and the dividend is probably safe in 2017. What happens after that is down to the oil price.
Capita loss
Outsourcing and professional services specialist Capita Group (LSE: CPI) is the worst performing stock on the FTSE 100 this year, its share price down 60%. This has driven its yield to a dizzying 6.55%, the third highest on the index. The payout is comfortably covered 2.2 times, which may tempt income seekers, but this is clearly a company with problems.
Capita’s shares hit a 10-year low this month after it issued its second profit warning in three months and announced plans to offload assets. Management blamed Brexit-related client indecision but denied it needed to raise capital or cut the dividend. Some investors will see this as a buying opportunity, especially since this year’s 8% drop in EPS is expected to flatten out in 2017. Today’s valuation of 6.89 times earnings is also tempting for risk-takers. Especially when you consider that last year’s two biggest FTSE 100 losers, mining giants Anglo American and Glencore, are this year’s winners, up 300% and 200% respectively.
