Should you buy these 3 stocks despite their low yields?

Burberry fashion AW16
Burberry fashion AW16

The FTSE 100 is awash with stocks trading on dizzying yields of between 5% and 7% but that doesn't mean you should ignore companies paying more modest yields of 2% or 3%. The following three may rank low on the yield league table but still merit your attention.


Smoke without fire

British American Tobacco(LSE: BATS) is the smoker's and dividend investor's friend, but the yields aren't as addictive as they used to be. This may be one of the most reliable dividend payers on the FTSE 100 but it trails the index, paying 3.26% against an average yield of 3.71%. There's a good reason for this, and I do mean good. The stock is up 40% over the past 12 months and despite management's progressive values, it's clearly hard for the dividend to keep pace with that kind of growth.

Few investors will be complaining, especially with management recently lifting the interim dividend by 4% to 51.3p. The long-term question is whether British American Tobacco can remain resilient in the teeth of global anti-smoking trends, but that isn't a worry for now as it continues to grab market share. However, trading at 23.05 times earnings it isn't cheap.

Trenchcoat warfare

Fashion house Burberry Group(LSE: BRBY) fails to cut a dash with its dividend, which currently yields a less than racy 2.81%. The company has struggled over the last five years, with its share price up just 10% against 30% on the FTSE 100, largely due to the slump in Chinese consumer spending. Earlier this year it announced a £100m cost-cutting campaign to offset the challenging luxury market but underlying Q1 retail sales of £423m were flat - although they did rise 4% in reported currencies. Like-for-like sales in China remained unchanged.

Nonetheless, the share price has staged a comeback in the last three months, rising 23% in that time. Part of this may be down to the Brexit bounce, while investors also cheered news of a £100m share buyback programme, to end no later than 18 April 2017. Burberry has a robust balance sheet and famous brand, and has built a strong digital business with a loyal online following. However, with a pricey valuation of 18.9 times earnings and zero forecast earnings per share growth next year, Burberry could remain out of fashion a while longer.

Dear Prudential

Insurance giant Prudential(LSE: PRU) has made a brave and successful foray into Asia that has helped drive the share price, although it has been punished by the emerging markets slowdown. The share price is down around 5% over the last year, which has revived its previously lowly yield, although it remains underwhelming at 2.86%.

The valuation is now more attractive, as this once expensive stock is now trading at 10.81 times earnings, and now could be a good entry point. Prudential delivered a 6% rise in first half group operating profits to £2bn, with new life division business profit up 8% to £1.26bn at constant exchange rates. Underlying cash generation jumped 10% while the dividend rose 5% to 12.93p. The company is taking a pause for breath but when Asia starts growing again, Prudential is likely to follow.

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Harvey Jones owns shares of Prudential. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.