I am ignoring the cash ISA and buying these FTSE 100 5%-yielders instead
According to my research, the best interest rate available on a flexible cash ISA today is just 1.45%. In comparison, the FTSE 100 supports an average dividend yield of 4.5% which, in my mind, makes the index a much better investment if you’re looking to grow your money.
What’s more, this dividend is only an average. There are some companies in the FTSE 100 that offer even bigger dividend yields. Today I’m going to take a look at two such companies.
Built for the long term
The first stock is financial services group Legal & General(LSE: LGEN). What I like about this company is that it’s built for the long term. Tens of thousands of investors and savers have trusted the business with their retirement funds, so it has to run the business from a long-term perspective. That means conservative operational management and a progressive, sustainable dividend policy. In other words, I reckon Legal & General has one of the safest dividends in the FTSE 100.
At the time of writing, the group’s dividend yield stands at an impressive 7.2% and the distribution is covered 1.8 times by earnings per share (EPS). City analysts are expecting this to grow in line with earnings for the next few years, which seems prudent as the company cannot afford to overstretch itself.
On top of the market-beating dividend yield on offer, shares in this financial conglomerate are currently trading at a relatively undemanding forward P/E of 7.7. The rest of the financial services industry is trading at an average multiple of around 11 times forward earnings so, from this perspective, the stock looks undervalued.
The low valuation, coupled with the market-beating yield, is too good to pass up in my view, especially when cash ISAs offer just 1.45%.
Durable moat
Another FTSE 100 income champion I think might be a better investment than putting your money in a cash ISA is wealth manager St. James’s Place (LSE: STJ).
St. James’s is one of the UK’s largest and most respected wealth managers, which gives it a substantial competitive advantage over the rest of the financial services industry.
I think this competitive edge, or what Warren Buffett calls a ‘moat’, will ensure that St. James’s continues to grow steadily for many years. Over the past five years, the company has more than doubled net profit and analysts believe EPS will jump 58% in 2018, followed by growth of 16% in 2019.
Analysts also believe that growth will support a dividend increase of 15% for 2018, and 30% for 2019. If the firm meets these targets, it will yield 5.9% for 2019.
Dividend growth
As earnings have expanded steadily since 2012, the company has also produced an enviable record of dividend expansion. Since 2012, the distribution to investors has grown more than 300%, showing that St. James’s is committed to rewarding shareholders.
Overall, considering the group’s strong competitive advantage and position in the UK’s wealth management industry, I think it is highly likely St. James’s will continue to reward investors handsomely for many years.
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Rupert Hargreaves owns no share mentioned. 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.
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