With banks offering rock-bottom interest rates to savers, it’s no surprise that many retirees are looking to dividend-paying equities to supplement income in their golden years. And for those investors looking for very high yield options, there are a few large-cap stocks that may fit the bill.
A cash-rich builder
One is homebuilder Persimmon (LSE: PSN), whose shares currently kick off a 9.6% trailing yield based on the 235p paid out to shareholders last year. Going forward, management expects to return at least this amount of cash to shareholders in each of the next two years as it pays out its normal dividends and reduces the £1,154m mountain of cash it held as of June 30.
This pile of cash has built up quickly as firms like Persimmon have reaped the rewards of very strong demand for new homes coupled with conservative increases in supply that have kept prices very high. In the first half of this year, this meant it was able to increase revenue by 5% to £1,742m while its strong focus on cost control led to operating profits rising 13% to £518m.
The management team has done a very good job of both profiting from buoyant market conditions and being restrained in how it deploys the cash it earns – focusing on shareholder returns rather than building too many new homes or vastly increasing its land bank.
This conservative approach is to be applauded, but at the end of the day the company is still very vulnerable to the next economic and housing market downturn. Would-be investors are certainly well-compensated for taking on this risk via the company’s outsized dividends, but must be cognisant of the medium-term potential for considerable share price depreciation if economic growth goes into reverse.
Premium pricing power pays off
If owning a homebuilder at this point in the business cycle is a tad too risky for you, one high-yield option that’s less cyclical is British American Tobacco (LSE: BATS). The tobacco giant currently pays its shareholders a hearty 4.66% yield that comfortably beats the FTSE 100’s average.
Of course, this high yield and relatively cheap-but-attractive valuation of just 14 times forward earnings isn’t too surprising given the headwinds facing the industry, namely falling rates of smoking among developed country populations.
But this trend is nothing new and BATS is doing very well to continuing growing profits and rewarding shareholders despite this. In the first six months of the year, the group’s underlying revenue, which adjusts for the positive effects of its blockbuster Reynolds American acquisition and negative effects from currency movements, grew a solid 1.9% with operating profit up 2.4%.
Looking ahead, there’s still plenty of scope to consistently boost revenue and profits by continuing on its current path of doubling-down on higher return markets like the US, focusing on its most appealing brands like Lucky Strike and Kent that are taking market share from competitors, and keeping production costs low. And thanks to the addictive nature of its products, BATS also has the enormous benefit of non-cyclical sales and premium pricing power as smokers tend to be very loyal to their brand.
All told, I reckon these characteristics make it an ideal option for investors seeking steady quarterly payments from their holdings.
