3 stocks I’d buy with dividends yielding more than 5%

Roland Head reveals three of his top dividend picks, including his latest buy.

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Interest rates may have started to rise, but the interest available from cash savings is still very low. If you want to generate a useful income from your savings, I think it’s worth considering investing some of your long-term savings in good quality dividend stocks.

Today I’m going to look at three stocks which each offer a yield of at least 5%. All three pass my dividend safety tests. Indeed, I’ve already added one of these shares to my own portfolio.

Flying higher

I’m going to start small with £59m jet chartering specialist Air Partner (LSE: AIR). In addition to passenger services, this 50-year old firm provides cargo and emergency planning services for government and corporate customers.

Air Partner’s share price took a knock last year when it discovered some historic accounting irregularities. But this appears to have been a one-off problem. Pre-tax profit rose by 20% last year and management has said that trading so far this year is in line with expectations.

Broker forecasts for 2018/19 suggest that earnings will rise by about 5% to 8.9p per share. The dividend is expected to rise to 5.6p per share. These projections put the stock on a forecast P/E of 12.5 with a prospective yield of 5%. With a history of strong profitability and steady growth, I rate the shares as a buy at this level.

Taking the high road

Another opportunity in the transport sector is bus and rail operator Stagecoach Group (LSE: SGC). This well-known firm operates in the US and Canada as well as the UK, so the group’s profits aren’t dependent on a single market.

One problem faced by the firm recently was the loss of the East Coast rail franchise, which Stagecoach operated in partnership with Virgin Trains. This business contributed about 14% of operating profit, and its loss triggered a dividend cut last year.

However, the reduced dividend should be covered by non-rail free cash flow, making it a much safer payout.

I believe last year’s bad news is in already reflected in the group’s share price. And with the stock now trading on less than 10 times earnings, with a forecast yield of 5.3%, I’d be happy to buy.

Postal gains

The latest addition to my personal portfolio is Royal Mail (LSE: RMG). These shares have fallen by 26% from a May high of 632p. But I see little in the group’s outlook to justify such a gloomy view.

May’s full-year results showed that adjusted operating profit rose by 6% to £581m last year. Profit margins were broadly stable at 5.7%. And strong cash flow helped the group to repay net debt of £338m and finish the year with net cash of £14m.

Although the shift from letters to parcels will continue to require investment, these costs seem to be under control. The group’s 53% share of the parcel market provides a strong foundation for long-term planning, and is also helping to support growth in the group’s international business.

Industrial relations — a historic source of concern — seem to be improving. Strike action has been averted and the company says good progress is being made on pay and pension reforms.

All in all, I think Royal Mail looks too cheap at around 465p. So I was quite happy to pay 12 times forecast earnings to secure the group’s 5.4% dividend yield for my portfolio.

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.

Roland Head owns shares of Royal Mail. 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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