As the FTSE 100 rises to record levels, obtaining a yield in excess of 5% is becoming more difficult. While inflation currently stands at 2.3%, it is forecast to move higher during the course of 2017. This could make higher-yielding shares more in demand over the medium term. With that in mind, here are two stocks yielding over 5%. Is now the right time to buy them?
A struggling retailer
The trading conditions for UK retailers such as Marks & Spencer (LSE: MKS) continue to deteriorate. As mentioned, inflation is on the rise and there is a real risk that it will surpass wage growth this year. This situation was last seen in the aftermath of the credit crunch, when consumer spending came under severe pressure. The response from consumers was to switch to lower-priced options, which is why mid-market operators such as M&S struggled.
Looking ahead, it is forecast to record a fall in its bottom line of 1% in the current year. While unimpressive, its valuation appears to include a wide margin of safety. For example, it has a price-to-earnings (P/E) ratio of just 11.5. As such, even if its earnings guidance is downgraded, its share price may perform relatively well.
The company’s 18% share price fall in the last year means that it now yields 5.6% from a dividend which is covered 1.6 times by profit. This suggests dividends could rise over the medium term – even if profitability continues its downtrend. Therefore, while lacking a bright future for 2017 and 2018, now could be the right time for income investors to buy a slice of M&S for the long term.
A changing business
Centrica‘s (LSE: CNA) decision to focus on being an energy supplier, rather than producer, could backfire. Although it may create a more stable company on the one hand, it could lead to greater challenges on the other. While a lack of exposure to the volatile oil price may help Centrica to offer more stable earnings and a more solid dividend, political risk for energy suppliers could be about to increase.
As was the case during the credit crunch, consumers may now find that the cost of living increases at a faster pace than wage growth. This may lead politicians to declare a cost of living ‘crisis’, as was the case during the credit crunch. A possible result of this could be pressure on energy companies such as Centrica to reduce prices, which may lead to lower profitability in future years.
Despite this, Centrica remains a relatively attractive income stock. Its dividend yield of 5.7% is covered 1.4 times by profit, while its cost reductions should lead to a leaner and more profitable business in the long run. Therefore, despite having significant risks as it undergoes a major reorganisation, it could be one of the best dividend stocks the Footsie has to offer.
