2 bargain dividend stocks offering 5%+ yields

Edward Sheldon looks at two companies that have paid their shareholders big dividends in recent years.

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The FTSE 100 isn’t the only place that investors should look for high dividend yields. Indeed, according to data from Stockopedia, the FTSE 250 index currently has 30 stocks yielding over 5%. Here’s a look at two such.

Esure

Esure (LON: ESUR) is a provider of motor and home insurance products, that operates through two key brands – esure and Sheilas’ Wheels. Since floating in 2013, the insurer has paid its shareholders some very generous dividend payments. Last year, the group paid 13.5p per share, a yield of 5.2% at the current share price. Does that make Esure a good income stock? I’m not so sure.

Analysing the group’s last three dividend payments, it becomes clear that it operates a slightly unorthodox dividend policy. Its full-year dividends often include a ‘special’ one.

For example, the FY2016 and FY2015 dividend payments were 13.5p and 11.5p per share. Both of these payouts represented 70% of the group’s underlying earnings per share, and both comprised a base dividend of 50% and a special one of 20%. The FY2014 payout of 16.8p was 85% of the group’s underlying earnings per share. That comprised a base dividend of 50% and a special of 35%.

If we strip out the specials, the regular dividends paid were:

2016: 9.6p
2015: 8.2p
2014: 9.9p

Two issues come to mind looking at these figures. First, the yield is much lower. Last year’s payment of 9.6p was a yield of just 3.7%. Second, in 2015, the regular dividend was reduced. That’s not ideal from a dividend investing perspective, because ideally, income investors want to see a consistent pattern of dividend growth.

While Esure looks reasonably priced on a forward P/E ratio of 14.4, personally, I’d be hesitant to invest in the company for its dividend. I prefer to invest in companies that can demonstrate long-term track records of consistent dividend growth.

Amazing dividend track record

One such company that does have a fantastic long-term dividend growth record is Greene King (LSE: GNK).

Shares in the pub owner are heavily out of favour at the moment, having fallen from 980p in late 2015, to just 540p today, a decline of 45%. Has that fall created an opportunity for long-term investors? Quite possibly, in my view.

Last year, Greene King paid its shareholders dividends of 33.2p per share. That’s a yield of 6.1% at the current share price. On adjusted earnings per share of 70.8p, coverage was a healthy 2.1 times.

While some data providers’ records suggest that Greene King cut its payout in 2006 and in 2009/10, a deeper analysis of the company’s dividend history reveals a different picture. Indeed, if we account for a 2-for-1 share split in 2006 and a rights issue in 2009, the dividend wasn’t cut at all. The pub owner has increased its payout every year since 1997, an amazing achievement.

While the hospitality industry is no doubt going through a challenging period right now, as a result of Brexit uncertainty, muted consumer spending, and increased cost pressures, I believe shares in Greene King now offer excellent value for long-term investors. The stock trades on a P/E of under 8, and with a very generous dividend yield on offer, investors get paid to wait for a pick-up in the trading environment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Greene King. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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