According to my research, the most attractive cash ISA on the market today has an interest rate of just 1.7% if you are prepared to lock your money away for a year. If you are ready to lock your money away for three years, you can achieve an interest rate of 2%, but even that is less than inflation.
You can beat these dismal rates of interest by investing. Today I’m looking at two of the FTSE 100’s top income stocks to explain why they could be a better place for your money than a cash ISA.
Household name
The first company is ITV (LSE: ITV). This household name has built a reputation for itself as an income champion over the past few years, thanks to its steady growth and predictable cash flows.
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Back in 2012, the company paid a dividend of just 2.6p to investors for the full year. Since then the payout has grown substantially, hitting 7.8p per share for FY17. City analysts are expecting the firm to distribute a total of 8.1p per share for 2018, which gives a prospective dividend yield of 6.3%.
Usually, when a company’s yield rises above the market average, it is a sign that investors do not believe the payout is sustainable. I do not think that is the case here. ITV’s distribution is covered 1.9 times by earnings per share (EPS), and the firm recently defied expectations by reporting total revenue growth of 6% for the first nine months of 2018 — some analysts were expecting the group to report a decline in total revenues.
And on top of the market-beating dividend yield, shares in ITV are currently changing hands for an extremely modest 9 times forward earnings. While there are some concerns about the impact falling revenues from TV advertising will have on the company, I think this multiple gives a wide margin of safety for investors buying today.
Flying high
The second blue-chip stock I’m going to profile is low-cost airline easyJet (LSE: EZJ).
Just like ITV, over the past five years, easyJet has transformed itself into a dividend champion. The dividend payout has almost doubled on a per share basis since 2012, and on current analyst projections is equal to a dividend yield of 5.6%. This distribution to investors is covered twice by EPS, and the company has just under £400m of cash on the balance sheet to act as a backstop if earnings come under pressure.
What I like about it is that it is one of the best-managed airlines in the world and has always taken a sensible approach to capital allocation. Prudent management has helped the company grow steadily while keeping its balance sheet clear of debt and improving returns to shareholders. Even though the company’s CEO stepped down (to move to ITV) earlier in 2018, I expect this way of operating to continue for the foreseeable future as easyJet continues to build on its past successes.
The shares are currently changing hands for 8.9 times forward earnings and a price-to-book value of only 1.3, which once again gives a wide margin of safety for investors buying today in my opinion.
