Forget the cash ISA! I’d buy these FTSE 250 dividend stocks to protect my savings

Roland Head looks at the income credentials of two out-of-favour FTSE 250 (INDEXFTSE:MCX) firms.

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I don’t know about you, but I’m getting tired of receiving less than 1.5% on my cash savings. Although I believe it’s important to keep a rainy day fund in cash, with inflation at 2.4%, the real spending power of my savings is falling each month.

With such low interest rates, I have no chance of saving for retirement using cash alone. That’s why the majority of my personal savings are invested in dividend stocks. These provide me with a much higher cash income and the possibility of capital gains.

Today I want to look at one dividend stock from my own portfolio and another that’s on my shopping list.

A tasty long-term buy?

Food producer Greencore Group (LSE: GNC) supplies many big retailers with takeaway sandwiches and ready meals. However, the firm’s performance has disappointed investors this year. A profit warning in March was followed by a surprise decision to sell its US business in October.

This strategic shift made me question my bullish stance on the stock. However, the latest figures from the firm have left me feeling fairly confident about the outlook for shareholders.

If we ignore the group’s US operations, which have now been sold, we see that sales in the UK and Ireland rose by 4.2% to £1,498.5m last year. Adjusted operating profit from these sales rose by 1.7% to £104.6m. Profits rose by less than sales, which means that profit margins fell. In this case, the numbers show a fall in operating margin from 7.2% to 7%.

I can live with this, in these circumstances. The group still generated an impressive 15.6% return on invested capital in the UK last year. Over the next few years, my hope is that a tighter focus on the UK business and plans for debt reduction will improve this figure.

Looking ahead, analysts expect Greencore’s adjusted earnings to rise by 5% to 15.8p per share in 2018/19. The dividend is expected to climb 7.5% to 5.99p.

These forecasts put the stock on a 2018/19 price/earnings ratio of 11 with a dividend yield of 3.4%. At this level, I believe the stock could be a good defensive buy for long-term investors.

A 6% stock I already own

One stock I already own is bus and train operator Go-Ahead Group (LSE: GOG). This company has had a lot of bad press as the operator of the troubled Govia Thameslink Railway (GTR) franchise, which includes Southern Rail.

Happily, the firm seems to be moving on from this troubled period. Management said that GTR delivered an “improved operational performance” during the six months to 28 November.

Go-Ahead has also announced a deal with the Department of Transport that will see the firm continue to run the GTR franchise until its 2021 expiry, in return for £15m of investment in “passenger enhancements”.

Overseas growth

Chief executive David Brown hopes to reduce the group’s dependence on the UK market by expanding internationally. Go-Ahead has already won bus and rail contracts in Germany, Singapore and Norway.

Mr Brown expects free cash flow to improve this year and City analysts believe the group’s dividend will be maintained. Consensus forecasts for the current year put the stock on a price/earnings ratio of 10, with a dividend yield of 6.2%.

I rate the shares as a buy.

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 Go-Ahead Group. The Motley Fool UK owns shares of and has recommended Greencore. 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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