Forget the Cash ISA! I’d buy these 2 FTSE 250 dividend champions yielding 5% today

These FTSE 250 (INDEXFTSE: MCX) dividend growth stocks offer returns three times higher than the Cash ISA.

| 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.

Today, the best Cash ISA interest rate on the market is around 1.5%, which is less than the current rate of inflation. 

So, if you want to earn a better return on your money, you’re going to have to look elsewhere. One of the first places I think you should go looking for a higher return is the FTSE 250. 

Global income 

The first FTSE 250 income champion I think could be a great alternative to a Cash ISA is Hays (LSE: HAS). This global recruitment company has reported a surge in income over the past six years, with profits rising an average of 18% per annum since 2013. 

Hays has been able to profit from the booming global economy, which has lead to a spike in demand for skilled workers, the company’s specialism. Recruitment for the accountancy, finance, construction and information technology professions accounts for 51% of group net fees.

One of the great things about recruitment businesses like Hays is that they require very little in the way of capital spending, so they tend to highly cash generative. Hays is no exception. For the past five years, the company has reported an average return on capital employed — a measure of profitability for every £1 invested in the business — of 35%.

City analysts expect Hays to report a slight increase in earnings per share for fiscal 2019, and it looks as if the company is on track to meeting this target. In a trading update published today, management confirmed Hays’ full-year operating profit is expected to be in line with current consensus market expectations, even though overall group net fee income remained flat during the second quarter of 2019.

Cash generation also remains strong. The company ended the period with £130m of cash on the balance sheet, which should be more than enough to cover its dividend for the year. City analysts have the stock distributing 7.2p per share this year and 7.5p for 2020, giving a dividend yield of 5%. As well as this income, the stock trades at an attractive forward P/E of just 13.

Income growth

Another FTSE 250 income champion I’ve got my eyes on is Cineworld (LSE: CINE). I will admit, in the past, I’ve been sceptical about this company’s prospects. Its highly leveraged acquisition of US peer Regal left the group with a huge amount of debt, although it has nearly doubled net profit.

So far, the company seems to be progressing well with the deal, and my view of the business is starting to change. Earnings per share are expected to jump 18% for fiscal 2019, leaving the stock trading at a forward P/E 10.2. On top of this, analysts expect a 20% increase in the dividend yield, giving a yield of 5.4%.

These figures are attractive and, in my opinion, offset some of the risk associated with the high level of debt. The dividend is also covered 1.8 times by earnings per share, giving plenty of headroom to maintain the distribution while paying down debt at the same time.

Overall, if you are looking for a cheap FTSE 250 income play, I highly recommend taking a closer look at Cineworld, although due to its high level of borrowing, it might not be suitable for every investor.

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.

Rupert Hargreaves owns no share mentioned. 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

Investing Articles

5 FTSE 100 shares to consider buying for passive income right now

The FTSE 100 is having its best start to the year for ages, and that's pushing the top dividend yields…

Read more »

Investing Articles

One overlooked cheap share to tap into the year’s hottest theme?

This Fool describes the key things to think about when investing in copper stocks and analyses one cheap share to…

Read more »

Investing Articles

A cheap FTSE 100 stock that’s ready for a dividend hike in 2024

This banking giant is one of the FTSE 100's greatest dividend stocks. And at current prices, our writer Royston Wild…

Read more »

Growth Shares

Is the BP share price set to soar after Michael Burry invests in the firm?

Jon Smith takes note of a recent purchase from the famous investor behind The Big Short and explains his view…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

I’d focus on Kingfisher now after the Q1 report leaves the share price unmoved

With the share price near 262p, is the FTSE 100’s Kingfisher a decent investment now for dividends and business recovery?

Read more »

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

£500 buys me 493 shares in this 7.4% yielding dividend stock!

The renewable energy sector remains out of favour. As a result, there are some high-yielders around, including this dividend stock.

Read more »

Road trip. Father and son travelling together by car
Investing Articles

If I’d put £10k into Tesla stock 2 years ago, here’s what I’d have now

Tesla stock has fallen in the past few years. But the valuation looks temptingly low now, as we approach a…

Read more »

Google office headquarters
Investing Articles

Up 41.5% in a year, here’s why Alphabet is one of my top stocks to buy

Our author thinks Alphabet is one of the best stocks to buy. He says its undervalued, highly profitable and has…

Read more »