As someone with cash in the bank, the low interest rate hurts. The best I’m getting is just over 2% gross, but I’m having to tie that money up for a year. On my everyday savings accounts which are easily accessible, the rate is less than 1.5% gross. After tax, that barely feels like any return at all.
This lack of interest income caused me to seek out higher dividend paying stocks in an attempt to boost my income. One share I bought was utility company SSE PLC (LON: SSE) (LSE: SSE.L). Undoubtedly, its capital growth prospects are perhaps lacking when compared to a number of its UK-listed peers, but on the income front it’s still one of the best around in my view.
For example, in the 2016 financial year it is forecast to pay dividends of 90.2p per share. With its shares currently trading at 1368p each this equals a yield of 6.6%. Additionally, SSE is forecast to increase dividends per share by 1.7% next year which with inflation hovering around zero, could beat the growth in the price level over the next year.
As with most investors, I’m unsure when interest rates are going to rise. When they do, high-yield shares such as SSE which have relatively highly leveraged balance sheets could become less popular among investors. However, with such a high yield and a P/E of 12, I’m feeling comfortable about SSE’s share price prospects. In fact, I’m thinking of topping up my position with some recent dividends or with my ISA money which will be available in less than two months.
Another share in my portfolio which yields more than 5% is housebuilder Taylor Wimpey plc (LON: TW) (LSE: TW.L). Its share price fall of 11% year-to-date has helped to push its yield up to 5.4%. I’m happy with this level but am looking forward to the company’s forecast increase in dividends per share of 13% which is due to take place this year. This puts Taylor Wimpey on a prospective yield of 6.1%.
As with SSE, Taylor Wimpey is susceptible to an interest rate rise since it could dampen demand for housing. However, the pressure on UK housing is showing little sign of disappearing anytime soon, with there being a shortage of houses being built versus demand for housing among first-time buyers.
Although this situation may be helped by the additional stamp duty on second homes which is being introduced in the next financial year, I still feel reasonably upbeat about the prospects for housebuilders such as Taylor Wimpey. Its P/E of 10.5 indicates long term capital growth potential, thereby providing my portfolio with a potentially high level of capital gains as well as decent income returns.
The author owns shares in SSE and Taylor Wimpey at the time of writing.