Why I’d ditch the Cash ISA and buy this Woodford 8% dividend stock

This refreshingly simple business offers a sustainable 8% dividend yield, says Roland Head.

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The top interest rates available on easy-access Cash ISAs are currently about 1.5%. If you want to generate an income from your savings, this means a £100,000 lump sum will generate an income of just £1,500 per year.

By contrast, a number of dividend stocks offer yields of 6% or more per year — equivalent to £6,000+ on an investment of £100,000. Today, I want to look at three high-yield dividend stocks that are all held by fund manager Neil Woodford.

A sustainable 8% yield?

Shares in giftware retailer Card Factory (LSE: CARD) have fallen by 23% over the last year. Despite this, the firm seems to be a good, profitable business that’s likely to be a long-term survivor.

Figures released today showed sales rose by 3.3% to £436m last year. The company reckons it gained market share, despite falling high street footfall. Although operating profit fell 6% to £70.8m last year, this still represents a profit margin of 16%. That’s higher than most other retailers.

The group’s high margins are helped by its policy of designing and producing cards in house. Cash generation is strong and the total dividend (including special dividends) for 2018/19 will be 14.3p, representing 81% of adjusted earnings.

Card Factory shares now trade on 10 times earnings and boast an 8% yield. I think that’s probably too cheap for such a good business. Buy.

A complicated picture

Card Factory’s business is refreshingly simple. The picture is more complicated for high-yielding sub-prime lenders Provident Financial (LSE: PFG) and Non-Standard Finance (LSE: NSF).

The two firms are currently in the middle of a hostile takeover battle. This appears to have been orchestrated in part by Woodford, whose funds own about 25% of both companies.

Non-Standard is much smaller and was founded in 2014 by former Provident boss, John Van Kuffeler. He wants to buy his former employer, Provident Financial, which is currently in the middle of a difficult turnaround.

Van Kuffeler’s credibility has taken a hit this week after it emerged his firm’s past dividends have breached accounting rules. If the NSF finance team can’t even manage dividends successfully, then I think it’s worth asking whether they have the skills needed to merge with a much larger and more complex business.

Provident chairman Patrick Snowball certainly thinks that Non-Standard should take a step back. In a new letter to shareholders, he pointed out that the NSF team might not have the experience required to run Vanquis Bank, a regulated bank that’s a core part of the Provident business.

Snowball also took a swipe at Woodford and the other shareholders who’ve backed the deal so far, suggesting: “We see no benefit to those invested in Provident who do not have a similar holding in NSF.”

A speculative buy

Provident’s turnaround is challenging and may not be a complete success. But I don’t see any reason why NSF — which has lost money each year since its 2015 flotation — is likely to run the business any better.

Van Kuffeler’s plans to focus more heavily on doorstep lending also seem backwards to me. I think Provident’s broader portfolio of products and services makes more sense, given the increasingly tough regulation of high-cost lending.

NSF and Provident both have forecast dividend yields of more than 6%. In my view, Provident is the better buy. I’d avoid NSF, for now.

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 has no position in any of the shares mentioned. The Motley Fool UK owns shares of Card Factory. 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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