Forget the top cash ISA rate. I’m collecting 10% from this FTSE 250 dividend stock

Roland Head explains why he’s been buying this FTSE 250 (INDEXFTSE:MCX) high-yield dividend stock.

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When Bovis Homes Group (LSE: BVS) chief executive Greg Fitzgerald spent £139,000 buying Bovis stock at the end of November, he probably wasn’t thinking about cash ISA interest rates.

I suspect Mr Fitzgerald was motivated more by the knowledge that shares in the company he runs were priced to give an 11.4% dividend yield at that time. The Bovis share price has recovered somewhat since then and the forecast yield on the stock has fallen to 10.4%.

Trading figures released today make it clear that for 2018 at least, this yield is very real and will be delivered. At a time when the best easy access cash ISA rate is just 1.45%, I think it’s worth considering the income potential of dividend stocks.

That’s certainly what I’ve done in my own portfolio, which includes some Bovis shares. Today I want to explain why I remain a buyer of this housebuilder. I’ll also highlight another 10% dividend stock I own.

Ahead of expectations

Brexit was dominating the headlines on Wednesday morning, but the only comment from Bovis was that the resulting uncertainty had slowed sales of its larger homes. To address this — and the risk of a wider slowdown — the company is increasing its focus on sales to housing associations.

The firm’s figures for 2018 certainly seem impressive. Profits for the year are expected to hit a record high and be “slightly ahead” of market forecasts. The number of homes built rose by 3% to 3,759 and the group’s HBF customer satisfaction rating has increased from 2 star to 4 star.

Bovis will pay a total dividend of 102p per share for 2018, giving a yield of 10.4% at the last-seen price of 980p. But it’s worth noting that 45p of this is a special dividend, which may not be repeated in future years.

However, the group’s ordinary dividend alone still provides an attractive yield of 5.8% and is less likely to be cut, unless profits really collapse. I think Bovis is one of the best buys in the housing sector.

A 10% buy-and-hold stock?

Bovis isn’t the only 10% yielder in my portfolio. I also own shares of payment processing group PayPoint (LSE: PAY). This company’s main business is providing payment processing services to convenience stores and corner shops.

Historically, the firm’s focus was on allowing customers to make cash payments for bills such as utilities and mobile phone top-ups. But the group is expanding its services. Its newest systems also handle tasks such as parcel drop-offs, card transactions and stock management.

The company’s equipment is now installed in more than 28,800 shops in the UK, and its Collect+ parcel drop-off service is now available at more than 7,000 sites. As far as I can see, PayPoint doesn’t have any direct competitors in the UK.

The firm’s business model doesn’t require high levels of investment and can easily be scaled to add new customers. These characteristics have helped to make this a very profitable business, with strong cash generation.

The current forecast dividend yield of 10% is made up of a mix of ordinary and special dividends. I believe the total payout could fall as the firm nears the end of a period of cash returns. But I estimate that a yield of 7%-8% should be supportable. I may buy more of this stock.

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 Bovis Homes Group and PayPoint. 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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