With a yield of 5.6%, its clear why HSBC (LSE: HSBA) (NYSE: HSBC.US) has income appeal right now. However, HSBC also has superb dividend growth potential, too, and this means that the banks yield could be set to rise considerably over the medium term.
In fact, HSBC has a payout ratio of just 63% and this not only means that its dividends are very sustainable, with there being sufficient headroom with which to make shareholder payouts, but also that there is scope for strong dividend growth. For example, from 2015 to 2016, HSBC is expected to increase dividends per share by 6%, which puts the shares on a forward yield of 5.9%.
Furthermore, with HSBCs net profit forecast to rise by 18% this year, it appears as though the bank is hitting a purple patch which could lead to an even faster rate of growth in dividends over the medium term.
Over the next two years, BAE (LSE: BA) (NASDAQOTH: BAESY.US) is forecast to increase dividends per share at an annualised rate of 2.7%. While this may sound like a somewhat lowly figure, it is worth bearing in mind that inflation currently stands at zero and is expected to turn to a negative number during the course of the year. This means that BAE offers a solid real return, which holds considerable appeal for income seeking investors.
In addition, BAEs profitability is also on the rise after a challenging period that included a profit warning. This bodes well for the companys shareholder payouts and makes BAEs present yield of 4.2% much more sustainable.
And, with BAE enjoying significant barriers to entry which help to protect margins, as well as strong cash flow and a sound balance sheet, it appears to be a very appealing income stock, with these attributes also having the potential to act as catalysts for share price gains over the medium to long term.
Legal & General
While there are a number of great value stocks in the insurance sector, Legal & General (LSE: LGEN) more than holds its own versus sector peers. Thats because it offers an excellent income stream, with the companys shares currently yielding a very impressive 5%.
Looking ahead, there could be considerable scope for rapid increases in dividends, since Legal & General has a payout ratio of 70%. This means that the current level of dividend is very sustainable and, when combined with double digit earnings growth over the next couple of years, could see Legal & Generals yield move above 5% over the medium term.
Certainly, further share price gains could suppress yield rises, with investor sentiment being exceptionally strong and helping Legal & Generals valuation to rise by 142% in the last ten years. As such, now could be the perfect opportunity to buy a slice of Legal & General.
Of course, Legal & General, HSBC and BAE aren’t the only appealing income stocks in the FTSE 100. That’s why the analysts at The Motley Fool have written a free and without obligation guide called How To Create Dividends For Life.
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