While the buy-to-let industry has offered high returns in the past, its appeal as an income opportunity may be in decline. The prospect of further tax changes, rising interest rates and affordability issues mean that investing in property may no longer be a worthwhile move from an income investing perspective.
In contrast, the fall in the FTSE 100 over recent months means that stocks such as Barclays (LSE: BARC) may now offer impressive income potential. It has a 5% dividend yield, while its valuation suggests that capital growth could improve in future. Alongside another growth stock which released an update on Tuesday, it could be worth buying, in my opinion.
Improving prospects
The company in question is sales, marketing and support services specialist DCC (LSE: DCC). Its interim management statement for the third quarter showed that operating profit was significantly ahead of the same period from the previous year.
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Its LPG division benefitted from the contribution of recent acquisitions, with strong performance being recorded despite milder weather conditions. Growth was also delivered in the company’s Technology, Healthcare and Retail & Oil segments, where organic growth was complemented by the impact of acquisitions.
DCC is due to report a rise in earnings of 16% in the current year, which suggests that its strategy is working well. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 1.4, which suggests there may be a margin of safety on offer. Although the stock yields just 2% at the present time, its dividends have grown by 12% per year in the last four years. Since they are covered 2.7 times by profit, the company could become an increasingly attractive income opportunity.
Growth potential
As mentioned, the fall in Barclays’ share price could mean that it now offers good value for money. It is forecast to post a rise in net profit of 12% in the current year, which puts it on a PEG ratio of 0.7. At a time when the world economy continues to offer GDP growth forecasts of around 3.5% for the current year, this suggests that the stock could offer a wide margin of safety.
In terms of its income investing potential, Barclays is in the process of increasing dividend payments. Its strategy of cutting shareholder payouts in 2016 now seems to be paying off, since it has been able to strengthen its capital position. This could reduce its overall risk in the long run, while affording it the scope to raise dividends over the next couple of years.
Its forecast dividend payment for 2019 is expected to be covered 2.9 times by profit. Therefore, even if dividends doubled and net profit failed to move higher, it would still have dividend cover of 1.4, which would not appear to be excessively low compared to its banking sector peers.
With a dividend yield of 5%, Barclays appears to have income investing potential at the present time. As such, now could be the right time to buy it, with it seeming to have improving growth prospects over the medium term.
