Having at least some cash tucked away is something we strongly endorse here at the Fool. Once you’ve managed to build a decent buffer to protect you from unexpected life events. However, the question arises, as to what to do with any money left over?
When faced with the derisory rates of interest offered by cash ISAs (the less-than-inflation rate of 1.45% is the best you can currently get for an instant access account), I think it’s natural to make a beeline for high-yielding stocks, so long as these companies are actually capable of making such payouts.
Then again, even if a company offering a high yield is able to return the cash, a stagnant dividend isn’t all that attractive. Far more enticing are reasonably-priced quality firms (those that consistently achieve great returns on the capital they use) that also offer increasing cash payouts to their owners.
Should you invest £1,000 in Diageo right now?
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With this in mind, here are two FTSE giants that I think tick these boxes.
Dividends are served
£25bn-cap food and support services provider Compass (LSE: CPG) and its average-looking 2.5% yield doesn’t initially catch the eye. But stay with me on this.
This is a company that has grown its payouts annually for many years. Indeed, if you’d purchased the shares a decade ago, you’d actually be getting a higher yield thanks to the growth in the company’s share price. Let me explain.
In 2008/2009, the company returned 12p per share to holders. Its share price in March 2009 (when the final dividend was paid) was around 318p, giving a yield of 3.8%. Last year, the company returned 37.7p per share and has a share price over 1,500p. So, had you invested back in 2009, you’d have generated a yield of 11.9% on your original investment in 2018!
Of course, Compass won’t grow at the same pace over the next decade. Nevertheless, its average return on the capital employed (ROCE) over the last five years is a really-rather-good 24.1%. Free cashflow is increasing and dividends this year are likely to be covered twice by profits. You’ll need to pay 19 times expected earnings for the current year to acquire the stock.
Reliable hiker
Another FTSE 100 company with a good history of increasing its cash returns is consumer goods giant Unilever (LSE: ULVR) — owner of brands such as Marmite, Dove and Persil. Dividends here have been hiked in eight of the last 10 years.
Of course, you could argue that its sheer size means Unilever’s stock is unlikely to appreciate in value all that much. At 3.6% for 2019, the dividend is more generous than over at Compass, but still much less than elsewhere in the market.
While fair points to make, its defensive characteristics mean that Unilever is unlikely to sink in value either, thereby making it a decent choice for risk-averse investors. Earnings per share are predicted to rebound by 8% in 2019, leaving the stock trading on a forecast P/E of a little under 19. That’s not unreasonable, considering the 24.5% average ROCE over the last five years.
In addition to the above, it’s also worth pointing out that Unilever’s payout ratio — the proportion of earnings paid out to shareholders — is a little under 38%. This should mean there’s scope for the company to continue increasing dividends in future years.
Unilever reveals its latest set of full-year numbers to the market this Thursday. So watch this space.
