Forget the top cash ISA rate. I’d rather get 7% and 9% from these FTSE 250 dividend stocks

Royston Wild looks at two FTSE 250 (INDEXFTSE: MCX) income shares that are better ways to invest your savings than sticking them in a cash ISA account.

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Even during times of financial market tumult like these, electing to invest in cash accounts like an easy access ISA remains one of the biggest mistakes that savers can make.

Conventional thinking, which asserts that these products are ‘safer’ than investing in the stock market, couldn’t be more wrong. How could it not be when the inflationary impact is actively eroding the value of your savings? And that deficit between the best-paying cash ISA (1.45% AER from Virgin Money) and the pace of consumer price inflation (2.4% in October, according to latest Office for National Statistics data) is pretty wide.

Dividend hero

A much better way of making your cash work for you is buying into some of the FTSE 250’s big dividend stocks. One such share is Ibstock (LSE: IBST), and I’m so confident in the company’s ability to deliver huge shareholder returns that I myself bought into the company last year.

Since that time, the news flow hasn’t been too encouraging. Ibstock’s share price took a whack in summer when it advised that production issues at its brickmaking factories would hurt full-year output levels, and patchy market sentiment since then has seen it fail to recover.

My enthusiasm for the construction materials colossus remains undimmed, though. Housebuilding in the UK remains strong and is likely to continue to be so given the country’s yawning homes shortage. Indeed, Ibstock commented last month that “whilst the uncertainty around the ongoing negotiations for the UK’s withdrawal from the EU persists, the market backdrop in the new-build housing sector remains positive.”

Throw in the domestic production shortage that is driving brick imports from foreign suppliers, and the stage appears set for brick prices to keep on rising. This means that City analysts expect Ibstock, whose earlier production problems are expected to push profits 11% to the downside in 2018, is anticipated to come roaring back with a 10% bottom-line increase next year.

And this bright outlook means that the business, helped by the sale of its Glen-Gery US division for $110m a month ago, will have the confidence to keep paying generous dividends. Full-year rewards of 14.5p per share are anticipated for both 2018 and 2019, resulting in a massive 7.1% yield.

11% dividend yields!

Like any stock, Ibstock carries a certain degree of risk, but in my opinion its forward P/E ratio of 10.7 times is far too low a rating. I’d say the same for payments processing and retail services tech builder PayPoint (LSE: PAY), whose corresponding multiple of 12.3 times also sits below the widely-accepted value benchmark of 15 times and below.

Last time I covered the FTSE 250 firm I lauded the rate at which its new products are being adopted and I was encouraged by fresh trading details last week in which it advised that the rollout of its Paypoint One terminals remains on track to hit the 12,400-site marker within the next few months. It’s no surprise then that City analysts are expecting earnings to rise 1% in the 12 months to March 2019 and by a further 5% in fiscal 2020.

The number crunchers are expecting last year’s 82.5p per share total dividend to be raised to 84.6p this year and to 86.1p next year. Such payouts yield a mammoth 10.8% and 11% for fiscal 2019 and 2020 respectively and make PayPoint a hot income stock to buy today.

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.

Royston Wild owns shares of Ibstock. The Motley Fool UK owns shares of PayPoint. 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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