Two 5%+ dividend stocks to boost your retirement prospects

These two shares could bring you a step closer to retirement.

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With the FTSE 100 trading close to a record high, finding shares with wide margins of safety is becoming more difficult. After all, valuations are relatively high and yet the prospects for the UK and global economies remain somewhat uncertain, so the risk/reward ratios for many shares may be starting to seem less desirable. Despite this, I think there are still stocks which could be worth buying. These two shares could help you to retire earlier than you had previously planned.

Turnaround potential

The performance of support services company Capita (LSE: CPI) has been hugely disappointing of late. It is currently enduring its toughest period for a number of years, with both a profit warning and change of CEO creating instability for its investors. In the short run, things could get worse before they improve. Capita’s strategy could change under new leadership and its profitability could suffer.

However, in the long run I believe it remains a relatively sound income stock. It currently yields 5.6% from a dividend that is covered 1.7 times by profit. This indicates that, even if its financial performance comes under further pressure, dividends have a good chance of being maintained. And since the company is forecast to deliver a rise in earnings of 4% next year, its current level of shareholder payouts appears to be sustainable.

Should you invest £1,000 in Centrica right now?

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Of course, Brexit could cause the UK’s economic outlook to worsen. Inflation has risen to 2.3% and is forecast to move higher, while consumer confidence is continuing to weaken. As such, cutting costs could become a key part of the short run for many of Capita’s customers. However, with its shares trading on a price-to-earnings (P/E) ratio of just 10.3, they seem to have a sufficiently wide margin of safety to merit purchase for the long run.

A changing business

Centrica (LSE: CNA) has long been regarded as a solid income stock. However, its status as such has perhaps declined in recent years. The company’s exposure to the oil and gas industry has meant that its profitability has suffered greatly from the declining oil price.  Centrica decided to re-base its dividend, which  means that its dividend per share is 27% lower today than it was in 2013.

Despite this disappointment, the outlook for Centrica is relatively positive. Its shares currently yield 5.8%, which makes them one of highest-yielding stocks in the FTSE 100. Furthermore, the dividend is covered 1.4 times by profit, which indicates it is highly sustainable at its current level. And with the company in the process of restructuring its business, it could become a more defensive share that pays a reliable dividend each year.

While many other utility stocks trade on high P/E ratios, owing to their defensive prospects and reliability during an uncertain period, Centrica’s P/E is just 12.8. This indicates that the market has already priced in potential difficulties arising from its reorganisation, which may mean that now is a good time to buy it for the long run.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Capita Group and Centrica. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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