With Cash ISA rates topping out at about 1.5% for easy access accounts, it’s not hard to find shares that provide a much higher level of income.
To give you an idea of what’s possible, I’ve chosen three FTSE 250 dividend stocks with 5% yields that I’d be happy to buy for my income portfolio.
Profit from renewable energy
Utility stocks are unpopular at the moment. The big firms are losing customers and face the risk that a Labour government might try to renationalise them.
In my view, there are safer choices for investors who want to invest in renewables. One of my top picks — a stock I own myself — is The Renewables Infrastructure Group (LSE: TRIG). This is essentially a financial company that invests in renewable energy, mostly UK wind farms.
The company’s policy is to pay quarterly dividends using the cash it receives from its assets. At the time of writing, the shares boast a forecast yield of 5.4%. According to the firm, the biggest single risk to its performance would be a major shortfall in electricity output. Given the geographical spread of the group’s assets, this seems a fairly low risk to me. I’m happy to hold and rate the shares as a buy for income.
I’m on the bus
Britain’s fragmented rail network has proved troublesome for the private companies who run rail franchises. But operating buses seems to be much simpler and more profitable.
Southern Rail owner Go-Ahead Group (LSE: GOG) is a good example of this. The firm’s bus operations generated 67% of its operating profit last year, with rail providing the remainder. Although management hasn’t given up on UK rail, the firm isn’t putting all its eggs in one basket.
International operations are expected to deliver 15%-20% of operating profit by 2022, reducing Go-Ahead’s dependence on the UK market.
I also expect demand for public transport to continue to increase as our cities become larger and more densely populated. In my view, Go-Ahead is a great way to play this trend.
The firm generates plenty of spare cash and hasn’t cut its dividend since listing on the stock market in 1994. That’s 25 years of unbroken dividends, during which time the payout has increased from 4.8p per share to 102p per share.
At current levels, the shares offer a forecast yield of 5.3%. I’d be a buyer at this level.
Safer than houses
The big housebuilders offer some very tempting dividend yields at the moment. But in my view they carry a lot of political and cyclical risk. Although the UK certainly needs more houses, any change to market conditions could hit builders’ profits.
I think that brickmaker Ibstock (LSE: IBST) could be a safer way to profit from the demand for new housing. This £1bn firm has been investing in new capacity to meet demand, which has seen its existing plants running flat out for extended periods.
It’s a surprisingly profitable business, in part because no builder likes to import bricks if it can buy them locally. Bricks are heavy and bulky and have high transport costs — so this should be one business that doesn’t suffer from cheap overseas competition.
Ibstock’s accounts for 2018 show good cash generation and a healthy 25% operating profit margin. Looking ahead, the stock trades on 13 times forecast earnings, with a 5.1% yield. I’d buy.