While forecasting 2017 is likely to prove difficult as a Trump presidency and Brexit take hold, income stocks are likely to prove popular among investors. That’s because inflation in the UK is expected to rise to around 3% and interest rates are forecast to remain low. As a result, obtaining a high income return could become increasingly challenging and important. Therefore, these two 5%-plus yielding shares could be worth buying right now.
A turnaround opportunity
Education specialist Pearson (LSE: PSON) has endured a difficult period, but now has a strategy which is set to revitalise its bottom line. Although a fall in earnings for 2016 of 21% is currently expected, 2017 is due to be a much better year for the business. In fact, a rise in earnings of 15% is expected in the current year as efficiencies and cost cuts positively impact on the company’s bottom line.
Despite last year’s anticipated decline in profitability, Pearson has taken the decision to retain dividends at their previous level. This puts the company’s shares on a yield of 6.2%, which is among the highest in the FTSE 350. Furthermore, with 2017’s forecast rise in earnings, dividends are due to be covered 1.25 times by profit. This shows that shareholder payouts are at a sustainable level and could rise by at least as much as inflation over the medium term.
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Clearly, Pearson is in the middle of a difficult period, but it remains a sound turnaround play with a robust dividend. As such, now could be an excellent time to buy it.
A top notch resources stock
With the price of oil having risen by almost 50% in 2016, it’s unsurprising that BP (LSE: BP) made a gain of 44% last year. Despite this, it still yields 6.1%. Dividends are expected to be fully covered by profit in the current year and this means that they remain relatively sustainable at their current level. Certainly, dividend growth could be sluggish as the company rebuilds its coverage ratio, but an income return of over 6% remains hugely appealing.
Looking ahead, the price of oil could continue to rise as increasing demand and a cut in production combine to produce a more balanced relationship between supply and demand. BP’s asset base remains strong and with compensation payments for the Deepwater Horizon oil spill set to tail off over the medium term, its financial standing could gradually improve during the course of 2017 and beyond. This could lead to higher dividend payments in future years.
BP trades on a price-to-earnings (P/E) ratio of 16. This indicates that it’s fairly priced given the upbeat outlook for the wider oil sector. This scope for an upward rerating plus its high yield make it a star buy for both value and income investors, while its potential for higher earnings thanks to a rising oil price, make it a strong growth play too.
