Interest rates may be starting to creep higher in the US, but the rates available on cash savings accounts remain at rock bottom. High-yield stocks are likely to remain an attractive option for long-term investors in 2017.
Today, I’m going to look at three FTSE 100 stocks that each offer a yield of 6%. Should you consider adding these to your portfolio at current levels?
A Neil Woodford favourite
Life insurance and investment group Legal & General Group (LSE: LGEN) was hit hard by Brexit, and looks likely to end 2016 down 10%. There’s no good reason for this weakness, in my view.
The company doesn’t expect Brexit to impact operations and has made good progress with new business this year, winning several large pension scheme mandates. Indeed, City analysts have increased their profit forecasts for 2016 in recent months, leaving the shares with a 2016 forecast P/E of 11.3 and a prospective yield of 6%.
Earnings growth is expected to slow next year, but I don’t see this as a major concern. Cash generation remains strong, and the dividend should be comfortably covered by earnings. At the end of November, Legal & General was also the fifth-largest holding in Neil Woodford’s Equity Income Fund. My own holding is much smaller, but I have no intention of selling just yet.
A banking bargain?
Shares of Asia-focused bank HSBC Holdings (LSE: HSBA) have risen by 22% so far this year. It may seem odd for me to describe the FTSE 100’s second-largest company as a bargain. But I believe the shares may still be cheap enough to qualify as a value buy.
HSBC’s forecast dividend yield of 6.1% isn’t expected to be covered by earnings this year. But earnings per share are expected to rise by 10% next year, bringing dividend cover up to 1.2 times, and marking a return to growth. The dividend looks a lot safer than it did at the start of the year.
Banks’ profitability is normally measured using return on equity. HSBC reported a return on equity of 4.4% for the first nine months of 2016, down from 10.7% for the same period in 2015. If HSBC can start to reverse this decline in 2017, then I believe the shares could deliver significant gains.
Have housebuilders fallen too far?
Persimmon (LSE: PSN) shares fell by 38% after the EU referendum in June. They’ve bounced back since, but are still worth 14% less than they were at the start of 2016. I believe growth is slowing in the housing market, but there’s no sign of a major downturn yet.
Mortgage rates remain very low, and most of the big housebuilders reported strong trading during the autumn.
Earnings forecasts for Persimmon have risen steadily this year, despite Brexit concerns. Brokers expect earnings per share of 192.7p, up by 12% from 172.4p at the start of the year. As a result, the shares trade on a forecast P/E of 9, with a 6.4% prospective dividend yield that’s covered by Persimmon’s net cash balance.
Although I remain concerned about the outlook for the housing market, I believe that Persimmon could deliver a positive result in 2017.