3 FTSE 250 dividend stocks with yields of 7%+ I’d buy today

These unloved FTSE 250 (INDEXFTSE: MCX) income stocks could be long-term winners, 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.

There’s no such thing as a free lunch. But I believe the stock market does sometimes offer us long-term opportunities in exchange for short-term discomfort.

The FTSE 250 stocks I’m going to look at today are good examples of this, in my opinion. All three face some kind of risk. But each one also has a solid track record, strong finances and a forecast dividend yield of more than 7%. Is now the right time to buy?

Reputation risk

The share price of oil services group Petrofac (LSE: PFC) has fallen by more than 50% since the Serious Fraud Office opened a bribery investigation into the firm in 2017. So far, only one former employee has been prosecuted, but the investigation remains ongoing.

As far as I can see, the first risk facing investors is that the company will eventually be prosecuted and hit with a big fine by the SFO. The second risk is that damage to its reputation could make it harder to win new work.

A trading update today seems to hint at this problem. Chief executive Ayman Asfari says that although trading is in line with guidance, the firm is facing “challenges in Saudi Arabia and Iraq”. These are the two countries involved in the SFO investigation.

The rate of new orders seems to be falling, with new orders of $1.7bn so far this year, compared to $1.8bn during the same period last year.

However, Petrofac shares now trade on about six times forecast earnings, with a 7.1% yield. If was to bet on this situation, I’d guess that the firm will weather this storm and return to growth. If I’m right, the shares could be good value at around 400p.

Safe as houses?

Big housebuilders continue to report record profits and pay generous dividends. FTSE 250 firm Redrow (LSE: RDW) is no exception. Pre-tax profit rose by 21% to £380m last year and has continued to rise this year. In April, shareholders were rewarded with a 30p per share cash return on top of the regular dividend.

RDW shares look affordable to me, trading at 1.2 times net asset value and on around six times forecast earnings. The total dividend payout (including one-off payments) for the current year is expected to provide a yield of more than 9%. The forecast dividend yield for 2019/20 is 7.4%.

What’s the risk? Well, many believe the UK housing market may be slowing. And the planned end of Help to Buy in 2023 could put pressure on profits.

My view: I’d be happy to buy Redrow today and then buy more shares at a lower price during the next market downturn.

Are you insured?

Motor insurer Sabre Insurance (LSE: SBRE) specialises in providing cover for high-risk drivers. These pay much bigger premiums.

This company’s smaller size and specialist focus has helped make it highly profitable. In 2018, only 70% of its premium income was needed for operating costs and claims. The figure for most mainstream rivals was over 90%.

However, growth was non-existent in 2018 and profits are expected to be flat again this year. Rising repair costs are also a problem.

Despite all of these risks, I’d suggest that this company’s specialist niche and high profit margins could make it a good buy at current levels. Trading on 13 times 2019 forecast earnings and offering a 7.7% yield, the shares look temptingly priced to me.

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 has recommended Redrow. 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

Investing Articles

A 9.6% yield but down 14%! Should I consider this FTSE gem for my dividend portfolio?

There are several things to consider when looking for FTSE shares with dividend potential. Here, our writer outlines his evaluation…

Read more »

Young Asian man shopping in a supermarket
Investing Articles

I’d shun Lloyds Banking Group and consider this stock for passive income instead

This company's dividend record knocks spots off Lloyds Banking Group's, and it looks like decent value now with a yield…

Read more »

Investing Articles

Will the 5.6% BT Group dividend yield grow in 2024?

Zaven Boyrazian explores whether BT Group can continue hiking its dividend and if the telecoms giant belongs in his income…

Read more »

Investing Articles

FTSE 100’s near a 52-week high, but this stock’s still dirt cheap!

The FTSE 100's on the rise, but not all stocks have been so fortunate. Here’s one company that got left…

Read more »

Investing Articles

Is this ‘secret weapon’ a multi-billion pound reason to buy Lloyds shares?

Dr James Fox explains how Lloyds shares could rise even higher as the bank's 'strategic hedge' is likely to boost…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

3 of the best penny stocks for growth, dividends, and value!

Looking for top penny stocks to buy? Royston Wild believes these UK small-cap shares could prove lucrative investments in the…

Read more »

Investing Articles

How I’d aim to turn an empty ISA into £275k by purchasing cheap shares this summer

Harvey Jones is taking advantage of the summer stock market lull to buy cheap shares and build a high and…

Read more »

Investing Articles

What’s the minimum I need to invest every month to earn a meaningful passive income?

When looking to secure a stream of passive income it's important to be realistic. Our writer investigates a strategy to…

Read more »