Have £5k to invest? Why I’d buy this FTSE 250 7% dividend stock today

This highly profitable FTSE 250 (INDEXFTSE:MCX) business looks cheaply priced, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing in stocks with very high dividend yields is always tempting. Today, I want to look at a company that yields 7% and also a firm with a much lower dividend yield. I’ll explain why one of these stocks is already in my portfolio and why the other is now on my watch list.

Is a profit warning on the horizon?

Online financial trading firm IG Group Holdings (LSE: IGG) has fallen by 37% over the last six months. The company’s stock is out of favour because of new regulatory restrictions hitting revenue. In short, non-professional traders can’t use as much leverage as they could previously.

IG isn’t the only company to be hit by the changes. Rivals Plus500 and CMC Markets have both issued profit warnings recently, saying that the impact of the new rules is more serious than expected.

Investors are worried that IG might have to do the same. With a trading update due in late March, we won’t have long to wait. But in the meantime, I think IG could be worth a look for long-term investors. Here’s why.

Buy the market leader

IG has been in business for 45 years, during which time it’s become a global leader in online CFD trading and spread betting. It’s the largest such firm listed in the UK and generates more revenue from professional traders (who are exempt from the new rules) than Plus500 or CMC Markets.

It’s also a very profitable and well-funded business. Over the last five years, IG’s generated an average pre-tax profit margin of 47% and consistently maintained a net cash position.

This tells me that this business should cope easily with a period of change, during which profits might dip. The group is working to diversify and I’m sure it will find a way to return to growth.

In the meantime, the shares appear to be priced for a fairly grim future, on 11.5 times 2019 forecast earnings, with a 7.6% dividend yield. I rate IG as a buy and have bought some myself.

Compare this

Unlike IG, price comparison website Gocompare.com Group (LSE: GOCO) isn’t the biggest in its sector. But results published on Thursday suggest to me it could be an attractive investment.

Although revenue only rose by 2.3% to £152.6m last year, operating profit jumped 14.2% to £37.7m. The reason for this is the company focused on maximising profits, rather than growing at all costs.

Although the number of customer interactions fell by 16% to 27.1m, the average revenue from each rose by 10% to £5.13. That seems fine to me, but some investors appear to be spooked. The shares were down by about 6% at the time of writing.

In my view, this downbeat view is unjustified. This business generated an operating profit margin of 24.7% last year and a return on capital employed of 105%. That means that for each £100 of capital invested in the business, Gocompare generated an operating profit of £105.

Some of this cash is being invested in new technologies, such as the weflip automated utility switching service. I expect more of this kind of service, which should drive repeat income from loyal customers.

Today’s results have left the shares trading on 8.4 times 2018 earnings with a 2.5% yield. I think that’s too cheap and have added the shares to my watch list for a possible purchase.

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 IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

The National Grid share price just plunged another 10%. Time to buy?

The National Grid share price is one of the FTSE 100's most stable, and nothing much happens to it? Well,…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 15% in 3 months, but I still won’t touch Vodafone shares with a bargepole

Harvey Jones has been shunning Vodafone shares for years. The FTSE 100 stock is finally showing signs of life, but…

Read more »

Growth Shares

This UK stock could be like buying Nvidia in 2021

Jon Smith thinks he's missed the boat with Nvidia shares, but flags up a UK stock that has some very…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The FTSE 100’s Intertek delivers a bullish update — can the share price soar?

I’d describe Intertek as a quality business with a decent dividend income, but will the share price shoot the lights…

Read more »

Market Movers

Up another 10% yesterday, how high can the Nvidia share price go?

Jon Smith talks through the latest results but flags up why further gains could be harder to come by for…

Read more »

Investing For Beginners

Down 43% in a year, I think this value stock is primed for a comeback

Jon Smith flags up why a FTSE 250 share has fallen so much in the recent past, but explains why…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Nvidia stock is stupidly expensive. Or is it?

Nvidia stock's up over 2,000% in the past five years. Christopher Ruane explains why it could be wildly overvalued --…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

The FTSE 100 stock I’ve been buying this week

Stephen Wright thinks the FTSE 100 slipping back this week has offered an opportunity in one of the highest-quality UK…

Read more »