Forget a cash ISA. I’d pick up a 6% dividend yield from FTSE 100-member RBS’s share price
With the FTSE 100 falling in recent months, many investors may be increasingly attracted to cash ISAs. After all, they offer around 1.5% in income returns plus a lack of scope for capital loss.
However, FTSE 100 shares such as RBS(LSE: RBS) could deliver significantly higher income returns over the long run. The company is expected to rapidly grow its dividends over the next couple of years so that it yields around 6% in 2019.
However, it’s not the only dividend stock which could be worth a closer look. Reporting on Monday was a housebuilder that could deliver improving income prospects in my opinion.
The company in question is Scottish housebuilder Springfield Properties(LSE: SPR). It released a trading update for the six months to 30 November which indicated that strong demand has continued throughout the period. The underlying requirement for more homes in Scotland for private individuals as well as across the social housing sector has continued. This supported good progress in completions and revenue growth across the business.
Clearly, there is considerable uncertainty in the near term regarding the prospects for the UK economy. This could cause the stock to become increasingly unpopular among investors at a time when a risk-averse attitude is becoming more prevalent. However, with a shortage of supply being outstripped by increasing demand, the fundamentals of the industry appear to be sound.
With Springfield Properties having a dividend yield of 4.2% from a payout which is covered 2.7 times by profit, it appears to have a bright income outlook. A price-to-earnings growth (PEG) ratio of 0.4 suggests that the stock may also be able to offer improving capital growth in the long run.
After a number of years without paying a dividend, RBS is set to become one of the highest-yielding shares in the FTSE 100 over the space of around two years. As mentioned, it is expected to yield 6% in the 2019 financial year, with a mix of a rapidly-rising dividend and a weak share performance being contributing factors.
With the bank’s profitability expected to increase by 6% in the current year, followed by 5% growth next year, it appears to be performing well. Certainly, the UK economy may undergo a period of weakness due in part to fears surrounding Brexit. But with the economy’s growth outlook still being relatively high at 1.6% per annum according to forecasts, weak investor sentiment could present a buying opportunity for UK-focused stocks such as RBS.
Clearly, the bank is still not as financially strong as many investors would have hoped it to be a decade after the financial crisis. However, rising dividends suggest that its management team is confident in its outlook, and a PEG ratio of 1.6 may indicate that it offers capital growth potential alongside an improving income return. As such, now could be the right time to buy it for the long term.
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Peter Stephens owns shares of Royal Bank of Scotland Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.