Two 6%+ yielders that could give you a second income

Rupert Hargreaves looks at two income stocks that have the potential to help you achieve financial independence.

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Towards the end of last year, Sabre Insurance (LSE: SBRE) went public. The IPO didn’t attract much attention at the time, and it’s easy to see why. Sabre isn’t some flashy new tech company or luxury car-maker, it is a boring old insurance business. 

So if you didn’t notice this company hit the market, you’re not alone. And it looks as if Sabre is still failing to ignite investor interest. Over the past 11 months, the stock has barely budged. Today, the shares are trading just above the IPO price. 

Income champion

Despite what the rest of the market thinks, I believe Sabre could be a hidden income gem. The company, which operates the insurance businesses Go Girl, Insure2Drive and Drive Smart, is highly profitable and growing rapidly. Over the past four years, revenue growth has averaged 10% per annum, and net profit has increased by 21%.

But what really attracts me to the business is its income potential. City analysts believe the firm will throw off 18.6p per share to investors for 2018 and 2019, giving a dividend yield of 7.3% at current prices. Sabre has already paid out 7.2p as an interim payout and management is confident that the group is financially stable enough to offer investors a sizeable full-year payout.

Indeed, in a trading update issued today, CEO Geoff Carter said that, “having paid an interim dividend of 7.2 pence per share, the solvency capital ratio as at 30 September 2018 is at 195%, well above our target operating range of 140%-160%. This provides the board the option to return surplus capital to shareholders following the full-year results.

This seems to hint that Sabre has the potential to reward investors with a payout that could exceed current City estimates. With this being the case, I reckon income investors should keep an eye on the enterprise. 

Cash-rich 

At first glance, car dealer Pendragon (LSE: PDG) does not seem to have much going for it. Car sales in the UK are starting to weaken, and City analysts have the group’s earnings per share sliding 12% for 2018.

However, there is more to this business than meets the eye. Pendragon has been diversifying away from its traditional business of selling cars over the past few years and is now a major retailer of software for other dealers. At the same time, the group has been growing its aftermarket sales business, where profit margins are significantly higher. 

As a result of these changes, I reckon the firm is better positioned than any of its peers to survive when the going gets tough. What’s more, Pendragon is divesting its US operations, which should eradicate the bulk of the group’s debt, improving its dividend credentials

Right now the stock supports a dividend yield of 6%, and the payout is covered 2.2 times by earnings per share. On top of this market-beating dividend yield, shares in the car dealer are changing hands for just 7.8 times forward earnings. 

So, if you’re looking for cheap income, I believe Pendragon is worth a closer look. 

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pendragon. 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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