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

Black father holding daughter in a field of cows
Investing Articles

A FTSE 100 share that could create generational wealth

Investing in FTSE shares can help individuals pass down a significant chunk of cash to their children and grandchildren, data…

Read more »

Investing Articles

Here’s what the BT share price could mean for passive income investors

The BT share price has been falling for years, but that might be about to change. And dividends could be…

Read more »

Investing Articles

At £4.76, is the Aviva share price a steal? Here’s what the charts say!

Aviva has outperformed the Footsie over the last year. But is there still value in its share price? This Fool…

Read more »

Photo of a man going through financial problems
Investing Articles

Does a 43% price drop make this undervalued UK stalwart one of the best cheap shares to buy now?

After losing a third of its value of the past five years, this might be one of the most undervalued…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

My top 3 picks today for a £20,000 Stocks and Shares ISA

Here are three very different investments to consider for a Stocks and Shares ISA, covering both the UK and US…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The Darktrace share price has been surging — and it could climb higher

I think the Darktrace share price could have more room to run. Despite the competitive AI industry, the firm looks…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

With its 7% dividend, should I be watching the Aviva share price?

Dividend investors will struggle to find many companies with a yield above 7%, so should the Aviva share price be…

Read more »

Investing Articles

Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well…

Read more »