My top 3 FTSE 250 income stocks for 2020

Rupert Hargreaves highlights the income stocks he’s betting on to beat the market in 2020.

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Pub and dining group Marston’s (LSE: MARS) is one of my top FTSE 250 income picks for this year.

The stock supports a dividend yield of 5.9% at the time of writing, and the payout is covered 1.8 times by earnings per share.

These impressive dividend credentials suggest to me that Marston’s could be a great addition to a portfolio for 2020. Not only is the stock an income champion, but it also looks relatively undervalued at current levels. Shares in Marston’s are dealing at a forward earnings multiple of 9.6 compared to the market average of around 14.

Debt balance

It appears that one of the reasons why Marston’s is trading at such a deep discount to the rest of the market is the size of its debt pile. Group borrowing was £1.4bn at the end of its latest financial year, compared to a market capitalisation of £840m.

The good news is that management is speeding up plans to reduce debt with £70m of asset disposals planned in the company’s 2019/20 financial year, as well as a reduction in capital spending to help free up cash flow.

As borrowing falls, I think there’s a good chance the market could re-rate the stock higher in 2020, and investors will be paid to wait for the recovery.

Rising demand

I also think that homebuilder Redrow (LSE: RDW) could be an excellent income investment for 2020. With the UK facing a chronic undersupply of new homes, builders like Redrow can’t put up new properties fast enough.

The company’s earnings per share have more than doubled over the past four years, and considering the lack of supply in the housing market across the country, it doesn’t look as if Redrow’s growth is going to slow any time soon.

Government policies designed to stimulate homebuilding activity, such as cutting planning red tape, should help builders like Redrow increase output. With an operating profit margin of nearly 20%, shareholders should be well rewarded if Redrow goes through a growth spurt.

At the time of writing, the stock supports a dividend yield of 4.2%, and the payout is covered nearly three times by earnings per share. The company also has £124m of cash on the balance sheet, enough to fund the distribution for at least a year according to my research.

Niche market

Sabre Insurance (LSE: SBRE) might not be a household name, but I think this company has some of the most attractive income credentials in the FTSE 250.

Sabre owns a handful of car insurance brands, including Go Girl, Insure2Drive and Drive Smart. All of these brands fill a particular niche in the market and are highly rated by customers.

Insurance can be a risky business, but where Sabre differentiates itself is its conservative underwriting approach. The company will only offer coverage to the most trustworthy customers. While this approach has had an impact on growth, it has helped Sabre remain highly profitable. Net profit has grown at a compound annual rate of 11% for the past six years.

City analysts believe the company will distribute 100% of earnings per share in dividends for its current financial year, which gives a dividend yield of 6.6% on the current share price. Analysts are forecasting a slight decline in the payout next year, but a dividend yield of 6% is still projected.

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 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.

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