Dividend-bearing stocks on the London Stock Exchange are back in the black following a prolonged period of lagging behind inflation.
For the past two years, UK income investors saw diminishing returns from their equity portfolios, as inflation shot above 6% in early 2022 and continued to soar well above 10% as 2023 approached.
But with the price of goods returning to 4% in 2024, those 5%-yielding stocks are beginning to look a lot more attractive.
This is particularly true since the days of high-yielding savings accounts, where investors have opted to park their cash in recent years, are coming to an end. (That said, savvy savers can still find attractive 5%-plus fixed rates among the challenger banks, at least for now.)
According to Jonathan Webster-Smith, chief investment officer of Bowmore Asset Management, the FTSE 350 set is a hotbed of above-inflation income stocks, with 37% of FTSE 350 shares now having a yield that is above inflation.
“Income investors will be very glad to see a lot more UK companies return to giving them above-inflation yields,” said Webster-Smith.
“For investors planning for their retirement, for whom income is a primary concern, FTSE 350 shares are a core part of their portfolios.”
“Banks will likely remain a core part of the UK investment landscape. Their yields have sharply increased over the last decade, whilst their price-earnings have become more attractive over the same period.
“Bank investors should therefore be able to enjoy yields above inflation.”
Generally speaking, UK stocks have higher-yielding dividends than their US counterparts, which favour buybacks as the preferred option for shareholder returns.
A cynic might say high-yielding UK income stocks are also a symptom of delated valuations, and in fairness, they wouldn’t be wrong.
Either way, let’s have a look at some top income stocks on the FTSE 350.
Top yielders
According to Bowmore’s analysis, insurance firm Phoenix Group Holdings PLC (LSE:PHNX) is among the best-yielding British blue chips with an annual return of 10.5%.
Legal & General Group PLC (LSE:LGEN) and Aviva plc are other top yielders in the insurance sector at 8.1% and 7.6% respectively.
Meanwhile, HSBC Holdings PLC (LSE:HSBA) takes the top spot among the big banks with a bumper yield of 6.8%, while investment manager Ashmore Group (LSE:ASHM) plc generates 7.3% for shareholders.
Outside of financial services, broadcaster ITV PLC (LSE:ITV) is at the top of the blue chips with an 8.5% yield, while utility firms Pennon Group and National Grid also feature.
Bowmore also mentioned mining giant Rio Tinto and B&Q owner Kingfisher plc, whose shares yield 5.9% and 5.6% respectively.
Note that this data correlates to share prices as of 25 February so may have changed depending on share price movements.
Recent analysis by Morningstar cited Big Tobacco groups British American Tobacco and Imperial Brands as top yielders at 10.09% and 8.62% respectively, with BT, Lloyds Banking Group PLC (LSE:LLOY) and WPP thrown into the mix.
The case of Vodafone
Despite its enduring struggles with loss-making European assets, Vodafone Group PLC (LSE:VOD) is a famously generous income stock with a current yield above 11%.
Vodafone’s share price has fallen by nearly half over five years, but the telecoms giant continues to favour shareholder returns over reinvesting cash into growing and stabilising the business.
It makes Vodafone the perfect exemplar of the dichotomy in the markets: Income-generating stocks are rarely growth stocks, and vice versa.
When it comes to investing, you can’t always have your cake and eat it too.