With the FTSE 100 yielding in excess of 4%, it appears to offer strong income investing potential. Certainly, its income returns seem to be more appealing than those offered by a cash ISA. The latter lacks appeal due to a negative real return, as well as the potential for slow rises in interest rates over the coming years.
Within the FTSE 100, Shell (LSE: RDSB) is one of the highest-yielding shares. It could deliver impressive total returns alongside another large-cap dividend share which released a positive update on Tuesday.
Changing business
The company in question is British American Tobacco (LSE: BATS). It’s in the process of transitioning towards next generation products such as heated tobacco and e-cigarettes. Already, they’re set to contribute £900m in revenue in the current year. And with double-digit annual sales growth expected over the medium term, they could gradually become an increasingly important part of the business.
Consumer tastes are clearly changing when it comes to tobacco. Industry volumes are due to decline by 3.5% this year, and this trend is showing little sign of slowing. As such, the company’s decision to focus its resources on next generation products, while also maximising its pricing power in tobacco products, seems to be a solid growth strategy.
Since British American Tobacco has a dividend yield of 5.5% from a dividend payout which is covered 1.5 times by profit, it seems to offer an impressive income outlook. While there could be a degree of uncertainty ahead as management changes, and the transition to next generation products continue, it appears to offer a favourable risk/reward ratio.
Improving prospects
Witin the oil and gas sector, prospects have improved significantly in the last few years. The oil price has risen, and this has helped to boost profitability across the industry. Shell, for example, is expected to post a rise in earnings of 19% in the next financial year. This has the potential to improve its dividend affordability, while rising free cash flow could provide the company with the means to invest more heavily in its asset base.
With a dividend yield of 5.8% from a shareholder payout that is covered 1.5 times by profit, the prospects for the company from an income perspective appear to be bright. With the world economy continuing to grow at a fast pace, it would be unsurprising for the oil price to rise to even greater heights.
Certainly, Shell lacks the defensive appeal of some of its FTSE 100 income peers. But, with what seems to be a solid balance sheet which could benefit from asset disposal plans, the long-term prospects for the business appear to be sound. And since its shares trade on a price-to-earnings growth (PEG) ratio of 0.6, they could offer capital growth potential over the long term. As such, its total return prospects appear to be appealing compared to those of the wider FTSE 100 and a cash ISA.
