With interest rates cut to just 0.25% last week, life for income-seeking investors just became tougher. Savings rates on cash balances are generally less than 1% now and the Bank of England may seek to reduce interest rates even further, since its outlook for 2017 is dire. In fact, the Bank of England now projects that the UK economy will grow by just 0.8% next year, which indicates that a loose monetary policy is here to stay.
Fortunately, there are a number of high quality dividend stocks on offer at the moment that could boost your income returns. One example is education specialist Pearson (LSE: PSON). It yields 5.8% and while it’s enduring a challenging period as it seeks to implement a new growth strategy, its medium-term outlook is becoming increasingly positive.
For example, Pearson is expected to turn around a difficult few years, with its bottom line forecast to grow by 16% in 2017. This means that dividends are due to be covered 1.25 times by profit, which indicates that the current level of payout is sustainable. It also indicates that dividends could rise in line with profit growth in future years and with Pearson being an international company, it should be able to avoid much of the problems associated with Brexit such as a slowing UK economy.
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No easy ride
One company likely to be hit by Brexit is easyJet (LSE: EZJ). Demand for holidays among UK consumers may come under pressure, but perhaps less than many investors are anticipating. That’s because holidays are seen by many people as a staple rather than discretionary item. Therefore, while the budgets of holidaymakers may fall slightly, demand for easyJet’s flights is likely to remain high.
Furthermore, easyJet’s yield of 5.1% seems to adequately compensate investors for its higher risk versus a more defensive business. easyJet is expected to raise dividends by 8.8% next year and yet they’re still set to be covered twice by profit, which shows that even if easyJet’s profit falls, its dividend is likely to be very affordable.
Top of the income pile?
Meanwhile, BP (LSE: BP) is an even riskier income play, but with greater risk comes greater potential reward. Clearly, the price of oil is difficult to predict and while most commentators feel that it will rise over the coming years, price drops can’t be ruled out. In addition, BP’s yield isn’t expected to be fully covered by profit this year, with dividend coverage being tight next year at 1.06 times.
However, BP’s yield seems to fully reflect this risk. It stands at 6.9% and this puts it towards the top of the FTSE 100 income pile. Financially, BP is relatively sound and has a well-diversified asset base that’s likely to boost its profitability over the medium-to-long term. It also has a sound strategy to become increasingly efficient, which should boost margins and make increasing dividend growth more likely in 2018 and beyond.
