The uncertainty that has gripped investors across the globe means that stock markets are likely to remain volatile for the foreseeable future. After all, the world's second biggest economy, China, is struggling to meet the market's expectations regarding its growth rate and could turn out to be a less impressive market in which to operate than had previously been thought. And, with it being a key place for Australian commodities companies to do business, the knock-on effects on the ASX could be significant.
As a result, it seems to make sense to purchase stocks that offer a strong income element of return, since capital gains could prove to be somewhat elusive if markets continue to yo-yo. That's especially the case if, as expected, the RBA maintains a dovish stance regarding interest rates and seeks to lower them in order to provide a boost to the Aussie economy.
Two stocks that offer excellent income prospects are Suncorp Group Ltd (ASX: SUN) and FlexiGroup Limited (ASX: FXL). Their current yields stand at 6.6% and 6.5% respectively, with dividend payments from both stocks being fully franked. This puts them ahead of the ASX's yield by at least 170 basis points, since the wider index currently offers a yield of 4.8%. And, looking ahead, there is scope for their dividends to grow.
For example, specialist lender, FlexiGroup, is expected to benefit from increased demand for loans as a result of lower interest rates. As such, its bottom line is forecast to rise by 4% per annum during the next two years, which means that dividend growth should beat inflation during the period. In fact, FlexiGroup is due to yield as much as 7% in financial year 2017 and, with dividends being covered 1.7x by profit, there appears to be considerable scope for further rises over the medium term.
Similarly, diversified financial company, Suncorp, is expected to provide a stable income outlook for its investors as its profit is forecast to cover shareholder payouts 1.2x in financial year 2017. This should equate to highly sustainable dividend payments over the medium term and, as with FlexiGroup, Suncorp is due to yield as much as 7% in financial year 2017. Furthermore, Suncorp has an excellent track record of increasing dividend payments, with them rising by 8.6% last year and equating to growth of 16.8% per annum during the last five years.
Meanwhile, both stocks trade at sizeable discounts to the ASX's price to earnings (P/E) ratio of 14.9. For example, Suncorp has a P/E ratio of 14, while FlexiGroup's P/E ratio stands at just 9.1. Part of the reason for this is weak investor sentiment, with the two stocks falling by more than the ASX during the course of 2015. In fact they are down 10% and 11% respectively year-to-date, versus a fall of 6% for the wider index. However, with both companies recently reporting results which highlight their growth potential, they appear to be on the right track to post strong income, and capital, returns over the medium term.
