Forget 1.5% from a Cash ISA. I’d earn 5% from these FTSE 250 dividend stocks

These FTSE 250 (INDEXFTSE: MCX) stocks should continue to pump out cash, 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.

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.

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.

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 Go-Ahead Group and THE RENEWABLES INFRASTRUCTURE GROUP LIMITED ORD NPV. 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

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »