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My top 3 income stocks: Insurance Australia Group Ltd, Telstra Corporation Ltd and BHP Billiton Limited

Although it may feel as though interest rates can’t go any lower, just a quick glance at Europe says they most certainly can.

Sweden is the latest country to cut rates to zero and, with the UK having an interest rate of 0.5% and the Eurozone’s rate being just 0.15%, the RBA certainly has vast scope to slash our rate, too.

If the Aussie rate does fall, dividends could become even more important for savers and income investors. With that in mind, here are my top three income stocks.

Insurance Australia Group Ltd

With a fat, fully franked yield of 6.2% it’s not difficult to see why Insurance Australia Group Ltd (ASX: IAG) is one of my favourite income plays. Indeed, the insurance giant has increased dividends per share at a respectable pace over the last ten years, with them having an annualised growth rate of 4.4% over the period.

While this rate of growth is set to stall, as 2014 is set to be something of a subdued year for IAG’s bottom line, growth in the company’s profitability is due to return next year. Allied to a P/E ratio of just 11.6 (versus 15.6 for the ASX), this means that IAG could deliver capital appreciation as well as a top notch yield.

Telstra Corporation Ltd

Clearly, having Telstra Corporation Ltd (ASX: TLS) as one of my top three income plays is an obvious choice. However, that doesn’t make it any less appealing. That’s because Telstra offers a highly enticing combination of a superb yield and long-term growth potential.

Indeed, Telstra’s current, fully franked yield of 5.4% easily beats the ASX’s yield of 4.6% and, with the company having the potential to grow the top and bottom lines in Asia over the medium to long term, it could prove to be a sound growth as well as income play. In addition, with Telstra continuing to dominate the Aussie mobile market, stability should remain a highly appealing facet of Telstra’s make-up moving forward.

BHP Billiton Limited

After announcing the planned sale of its US shale gas assets, BHP Billiton Limited (ASX: BHP) seems to be well on the way to disposing of its non-core assets. While its yield of 4% (fully franked) may not be as appealing as many of its index peers, the rate of dividend per share growth that is pencilled in for the stock is hugely impressive.

For example, dividends per share are set to be 15.9% higher in FY 2016 than they were in FY 2014. This means that, within a couple of years, BHP Billiton could be yielding as much as 4.4% — and growing.

Furthermore, with shares in the diversified mining stock trading on a P/E ratio of 13.3 (versus 15.6 for the ASX) they seem to offer good value at a time when the valuations of a number of Aussie mega caps are being called into question.

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Peter Stephens does not own shares in any of the companies mentioned.

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