Forget the cash ISA. I’d collect 6% from the BP share price
Where should you put your cash if you want to be able to withdraw a regular income? One option is a cash ISA, which offers the benefit of guaranteeing the value of your cash while providing a predictable income.
The only problem with cash savings is that the interest rates available are so low. At the time of writing, the best easy-access cash ISA I could find was offering a 1.45% interest rate. If you were happy to tie up your money for three years, you could get 2.05%.
By contrast, the FTSE 100 currently offers an average dividend yield of 4.6%. And if you’re willing to invest in individual stocks, I believe the market offers several opportunities to earn a reliable yield of 6% or more.
Four payments each year
From what I can see, the payout has only been cut twice in the last 25 years — once in 1999/2000 and once in 2010, after the Deepwater Horizon disaster. On both occasions, the board rebuilt the dividend as a priority.
When the price of oil surged up to $85 last year, the BP share price hit a post-2010 high of 603p. The shares have now pulled back to around 515p and offer a tempting yield of 6% that should be covered comfortably by earnings and free cash flow.
Although the group’s debt levels remain a little higher than I’d like to see, chief executive Bob Dudley has judged market conditions well in recent years. I expect this to continue. With the shares trading on 11 times earnings and offering a 6% yield, I see this as a buy-and-forget stock for income investors.
How safe is this 9% yield?
Of course, it would be nice if we could earn more than 6%. But dividend yields above this level often carry a much higher risk of being cut. One high-yield stock I’ve been watching for a while is fashion retailer N Brown Group (LSE: BWNG). This firm’s main brands are JD Williams, Simply Be and Jacamo.
N Brown’s share price has fallen by around 80% over the last five years. Profit margins have slumped as the group has struggled with the transition to internet trading and faced a number of financial issues.
Some progress has been made. Offline operations are being scaled back and the internet now accounts for 78.5% of sales from the group’s three main ‘Power Brands’. But problems remain.
The outcome of a VAT dispute means that marketing costs will be £6m-£9m higher from 2019/20 onwards. The company also expects profit margins to fall again during the current year. One-off extra costs for the current year are expected to be above £67m — an amount that’s more than the company’s entire pre-tax profit last year.
N Brown’s customer credit business is profitable and is said to be performing well. But profit margins are continuing to fall in the retail business, while unexpected costs continue to rise.
The forecast dividend yield of 9% may seem tempting. But the payout has been cut this year and I believe the market is right to be cautious. In my view, further pain is likely for shareholders. I’d avoid this stock.
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Roland Head has no position in any of the shares 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.