Centrica is an 8%-yielding FTSE 100 dividend stock that I’d buy for 2019

Centrica plc (LON: CNA) could outperform the FTSE 100 (INDEXFTSE: UKX) next year.

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With the FTSE 100 having declined significantly in recent months, a number of shares could now offer good value for money. Certainly, there’s scope for further falls in a range of FTSE 100 sectors, but in the long run, there may be value investing opportunities on offer.

One company that could deliver improving total returns in the coming years is Centrica (LSE: CNA). It now has a dividend yield of over 8% after recording a share price decline in recent years. This could suggest that it offers a wide margin of safety and may be able to outperform the wider index in future. Alongside another stock which seems to offer good value and that reported news on Thursday, it could be worth buying, in my opinion.

Improving prospects

The company in question is industrial thread manufacturer Coats Group (LSE: COA). It announced the acquisition of ThreadSol for a total cash consideration of $12m. It’s a provider of cloud-based digital applications which enable brands, retailers and manufacturers to drive productivity gains, supply chain control, and speed to market.

The acquisition is set to support a key aspect of the company’s growth strategy which is focused on building an innovative software solutions business for the apparel and footwear industries. The initial cash outflow is $5m, with further payments of up to $7m over the period to 2022.

Looking ahead, Coats Group is expected to report a rise in earnings of 16% in the current year, followed by further growth of 8% next year. It trades on a price-to-earnings growth (PEG) ratio of 1.8, which suggests that it offers fair value for money and may be able to deliver improving capital growth in the long run.

Investment potential

As mentioned, Centrica has delivered disappointing share price performance in recent years. A combination of factors that include regulatory change, political risk and the transition to a new business model have contributed to disappointing financial performance. In turn, this has caused dividends to be cut and investor sentiment to decline.

Today, though, the stock could offer improved prospects. A dividend yield of 8.7% is exceptionally high, and suggests that it may have a margin of safety included in its valuation. At a time when the outlook for the FTSE 100 is uncertain, investors may focus increasingly on sectors that have historically showed relatively low correlation to the wider economy. Utility stocks may not have been an obvious choice during the recent bull market, but the potential for a bear market may make them more enticing to cautious investors.

Clearly, Centrica has a long journey ahead as it seeks to pivot away from its oil and gas operations. It could display further volatility and disappointment when it comes to its financial performance. But with a high yield and the potential to deliver improving operational performance through becoming more efficient, it may offer investment appeal for the long term.

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.

Peter Stephens owns shares of Centrica. The Motley Fool UK has recommended Coats Group. 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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