2 FTSE 250 dividend stocks yielding 6% I think Warren Buffett would buy

These high-quality FTSE 250 (INDEXFTSE:MCX) stocks would fit perfectly into Warren Buffett’s portfolio and could help improve your investment returns as well, says Rupert Hargreaves.

| 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.

If there’s one sector Warren Buffett understands more than any other, it’s insurance. He’s been involved in the insurance industry since the late 1960s and, today, his conglomerate Berkshire Hathaway is one of the largest insurance groups in the world.

Over the past five decades, the group has completed a string of deals in the sector snapping up some of the most significant players in the market.

Buffett likes to buy well-run, profitable insurance companies that have a track record of sensible underwriting. Firms like Lancashire Holdings (LSE: LRE).

Well-diversified

Lancashire is really three different businesses: Lancashire, Cathedral and Kinesis. As my Foolish colleague Kirsteen Mackay recently explained, Lancashire and Cathedral provide specialist insurance against catastrophic events such as hurricanes. They also offer unique insurance policies for the property, marine aviation and energy sectors.

On top of this, the Kinesis segment manages reinsurance for the business. It offers a management service for third parties who want to invest in the insurance industry but don’t know where to start.

Lancashire’s profitability track record is outstanding. The group’s 10-year average combined ratio (a measure of insurer profitability) is around 70%, compared to the industry average of nearly 100% (the lower the ratio, the better).

On top of this, management has adopted a policy of paying out as much capital as possible to shareholders. Shares in the insurance group currently support a regular dividend yield of less than 2%, but the company regularly distributes special dividends, which has jacked up the yield to more than 10% in the past.

Analysts are forecasting a total yield of 5.4% for 2019.

Sector leader

Another insurance business that stands out as a sector leader is Sabre Insurance (LSE: SBRE). Sabre stands out because the company has managed to carve out a niche for itself in the highly competitive car insurance sector.

The group’s three direct brands are Go Girl, Insure2Drive and Drive Smart, all tailored specifically to cater to individual needs. While they may be slightly more expensive than other policies, customers seem happy.

Revenue has grown at a compound annual rate of around 10% over the past five years, and City analysts are expecting the company to report a net profit of £50.2m for 2019.

Based on these figures, the stock is currently trading at a forward P/E of 15.3. This is slightly above what I would consider an appropriate valuation for a company that’s for not expected to report any earnings growth for the next two years. However, like Lancashire, Sabre likes to reward its investors with cash payouts.

This year, city analysts are forecasting a full-year dividend of 20.2p, which gives a dividend yield of 6.8% on the current share price. Sabre’s niche brands, as well as the company’s customer loyalty and cash generation, are the key reasons why I believe Buffett would be interested in adding this stock to his portfolio.

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 shares in Berkshire Hathaway and Lancashire Holdings. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). 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 black colleagues high-fiving each other at work
Investing Articles

2 FTSE 100 value stocks I’d buy for my Stocks and Shares ISA in March!

Now could be a great time for fans of FTSE 100 value stocks to go investing. Here are a couple…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Looking for value stocks? Here’s 1 I’d buy and 1 I’d avoid!

This Fool delves deeper into two value stocks she’s had her eye on and explains why she’s bullish on one,…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

With the Airtel Africa share price in pennies, is it a bargain?

With the Airtel Africa share price having slumped by a quarter in just one month, this shareholder considers some of…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Are these 2 defensive FTSE 100 stocks shrewd buys after recent updates?

This Fool takes a closer look at these FTSE 100 stocks. She admires their defensive traits -- but does that…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

The FTSE 100 closes up after full-year results from leading UK firms – are they buys?

Earnings season brings about a lot of ups and downs for the FTSE 100. Yesterday had some particularly good releases,…

Read more »

artificial intelligence investing algorithms
Investing Articles

Should I buy NVIDIA stock as a British investor?

NVIDIA stock is up two-thirds this year alone. Our writer considers some pros and cons, specifically given that he is…

Read more »

Investing Articles

With £2,000 in excess savings, I’d buy 41 shares in this Warren Buffett dividend stock

Stephen Wright thinks one of the best dividend shares to buy right now might be a Warren Buffett stock that’s…

Read more »

Investing Articles

How many Aviva shares do I need to collect a £100 monthly income?

Aviva shares are well suited for passive income purposes. Our writer works out how many would be needed for a…

Read more »