Looking for steady income? Consider this FTSE 100 4% yielder

This could be the best income stock in the FTSE 100 (INDEXFTSE: UKX).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you’re looking for steady income for your portfolio, you can’t go wrong with British American Tobacco (LSE: BATS). 

The tobacco producer is highly profitable and returns most of its income to investors. For the past decade, British American has reported an average operating margin of more than 30% and almost all of this income has been returned to investors or reinvested in the business to help spark up earnings growth. 

Double-digit growth 

Following the acquisition of Reynolds American in the US, for the years ahead, City analysts are expecting British American’s earnings to really take off

Earnings growth of 13% is predicted for 2017 followed by an increase of 10% for 2018, which is highly impressive considering the size of the group (£113bn market cap.). As well as this growth, the shares are set to support a market-beating dividend yield of 4% for 2018 with the payout covered 1.5 times by earnings per share, so there’s room for flexibility if earnings growth starts to stumble. 

That said, British American has grown its payout by around 10% per annum for the past few years, and there’s no reason why this can’t continue as earnings continue to expand.

The one downside about the shares is the valuation. Shares in British American currently trade at a forward P/E of more than 17, which is a bit expensive for my liking, although this valuation is justifiable considering the company’s growth and defensiveness. 

Falling out of favour 

Another top income stock you should consider for your portfolio is IG Group (LSE: IGG). Recently, shares in IG have been under pressure following a move by regulators to crack down on CFD and binary options products. 

Even though it’s not possible to tell what impact these actions will have on it as yet, I believe that the firm is extremely well placed to weather any changes. Indeed, as the most significant player in the sector, the group is already well diversified away from binary options with a recent trading update noting that less than 5% of revenues is now coming from these products.

All in all, management estimates that if the regulations are implemented in their current form, revenue will decline by 10% and is planning to offset this decline by ramping up marketing spend to entice new customers to other services, such as share dealing. 

Put simply, even if regulators place strict new rules on the company and its peers, it should only be a minor hindrance to the group. With this being the case, I believe that IG’s 4.8% dividend yield is here to stay, and would make a great addition to your portfolio. The payout is covered 1.4 times by earnings per share, and at the end of fiscal 2017 (31 May) IG had a cash balance of £323m so not only is the dividend well covered, but there’s also cash to back up the payout if earnings fall. 

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »