I own a portfolio of dividend stocks alongside my general portfolio. I think these stocks can be a helpful tool for generating income, although this might not be suitable for all investors.
Dividends are paid out of company profits, so firms may have to reduce or eliminate their distributions if profits slump.
Still, I am comfortable with this level of risk. Here are three dividend stocks with yields of 7% I’d buy today.
The first stock with a dividend yield of 7.5%, at the time of writing, is the insurance group Direct Line (LSE: DLG). Last year, the company reported bumper profits as lockdowns reduced accidents. As such, insurance claims registered with the firm fell. Management decided to return the excess profit to investors.
I think this trend could continue. The group has laid out plans to increase its combined ratio, a measure of insurance profitability, in the years ahead by cutting costs and improving pricing. I think this could lead to higher profits and more significant shareholder returns.
Of course, there’s a risk the group may miss the target. In that situation, management may have to reduce shareholder payouts.
Also, there have been some reports that the number of road accidents has increased as consumers have started to drive more frequently. This could also weigh on profits.
Despite these risks, I’d still buy the firm for my portfolio of dividend stocks.
Dividend stocks on offer
Over the past year, Plus has benefited from a surge in demand for its trading services. This has translated into high-profit growth. With profits expanding rapidly, the company has been able to return money to investors and go on the acquisition trail.
According to its first-quarter trading update, revenues for the three months to the end of March were up 121% compared to the previous quarter. The number of active customers using the group’s platforms has leapt to 269,743. For the same period last year, 194,024 customers were using the platforms.
Surging activity on its trading platforms has sent Plus500’s profits skyrocketing. But this might not last. The average revenue per user was $753 in the first quarter, down 52% from the $1,632 in the same period a year ago.
So some of the company’s pandemic windfall is receding, which could negatively impact the dividend. However, I’d buy the company for my portfolio of dividend shares based on its growth potential.
M&G also offers a dividend yield of 7.5% and has also benefited from a pandemic windfall. Rising stock markets have lifted the group’s assets under management. As a result, management fees have also increased.
M&G has also been buying growth with bolt-on acquisitions. It acquired Ascentric and its 95,000 customers in September. It also helped the company diversify into wealth management.
I think these initiatives could help support M&G’s dividend payout, and they’re the primary reasons why I’d buy it for my portfolio of dividend stocks.
That said, stock markets can fall as well as rise. If markets do suddenly go into reverse, M&G’s asset base could slide. This would hit management fees and group profits. In this situation, the company’s dividend may prove to be unsustainable.
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Rupert Hargreaves has no position in any of the shares 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.