The reputation of many top UK dividend stocks has been damaged in this year’s market crash. However, not all dividend stocks have been affected by cuts.
Today, I want to look at three stocks which I think we can trust to provide a reliable 5%+ cash yield for the foreseeable future. When the top fixed-rate Cash ISA is about 1.25%, I think dividend stocks are worth considering as an alternative source of income.
A safe 7% yield?
My first pick is FTSE 100 motor and home insurer Direct Line Insurance Group (LSE: DLG). Although this well-known firm did cancel last year’s final dividend in April, the company has now committed to a full catch-up payment.
Holders of this UK dividend stock will receive a 2020 interim dividend of 7.4p per share and a special dividend of 14.4p later this year. That’s a total payout of 21.8p per share, giving the stock a yield of about 7%.
Direct Line’s performance has remained stable this year and sales of policies under group brands, such as Direct Line and Churchill, have continued to grow. I believe the firm’s mix of direct selling and price comparison sales will help to protect its market share and generate attractive shareholder returns.
Looking ahead, I think shareholders should be able to generate a cash income of at least 7% per year by buying Direct Line shares at current levels.
A UK dividend stock you might have missed
My next pick is a share you might not have heard of. Greencoat UK Wind (LSE: UKW) is an investment company which owns wind farms around the UK. By investing in Greencoat, you can effectively invest directly in wind farms which aren’t listed on the stock market.
In recent years, Greencoat UK Wind has performed rather better than most traditional utility stocks. The firm’s dividend payments have kept pace with UK inflation, providing a reliable income for investors. This year’s forecast payout of 7p per share gives the shares a forecast yield of 5%. I see that as attractive for a renewable energy investment.
Right now, I think the main risk is that lower power prices could put pressure on future earnings. This could limit dividend growth. Despite this, I think UK dividend stocks like Greencoat are an attractive way to invest in a sector that’s expected to keep growing. I’d keep buying.
Specialist focus yields 6%+
My third pick is a specialist firm with a long-term focus. FTSE 100 life insurer Phoenix Group (LSE: PHNX) doesn’t sell many policies directly to the public. Instead, it buys up ‘books’ of existing policies from other insurers and combines these into its large and focused operation.
This enables Phoenix to generate cost savings and high levels of surplus cash. Much of this is returned to shareholders each year through the group’s generous dividends. To give you a taste, Phoenix generated surplus cash of £707m last year. About £465m was of this returned to shareholders through dividends.
Phoenix’s dividends haven’t been interrupted by the coronavirus pandemic. Broker forecasts suggest a payout of 47.5p per share this year. At a share price of around 700p, that would give a cash yield of 6.8%.
I see this as a pure-play income pick for investors in UK dividend stocks. I wouldn’t expect too much capital growth but, as an income play, I rate Phoenix very highly.
