I love finding good high-yield stocks. As a dividend investor, I’m always looking for opportunities to lock in above-average passive income from growing businesses. Of course, there’s always a risk. A high yield can sometimes be a sign of a business that’s struggling to grow and might even be shrinking.
The two companies I’m looking at today are both stocks from my personal portfolio. They both boast a forecast dividend yield of more than 8% and enjoy strong profit margins. In my view, both businesses have decent medium-term growth potential.
An 11% dividend yield?
My first stock is FTSE 100 mining and steel group Evraz (LSE: EVR). This £9bn group operates mostly in Russia and North America. The latest broker forecasts suggest Evraz shares offer an amazing 11% dividend yield at current levels.
If you’re thinking that such a high yield is too good to last, then I think you’re probably right. In my view, the current high prices for iron ore and steel could weaken over the next year, cutting the group’s profits.
However, Evraz does have a strong history as a high-yield stock. Based on the current share price, this stock has provided an average yield of 8% over the last four years. Broker forecasts for 2022 suggest the stock’s yield will fall to around 9%. That seems reasonable enough to me.
Evraz’s largest shareholder is Chelsea FC’s billionaire owner Roman Abramovich. He holds around 28% of Evraz stock, while a further 30% is held by two other Russian investors.
My feeling is that these key investors want the business to provide them with a good income, so I expect dividends to remain a priority. Trading on just six times 2021 forecast earnings, I still see Evraz as a buy for me.
This high-yield stock could motor ahead
Companies selling motor insurance have faced competitive market conditions in recent years, slowing their growth. This is why my second pick, Direct Line Insurance Group (LSE: DLG), currently offers a forecast dividend yield of 8.3%.
Rather than slashing its prices to win more business, Direct Line has found a balance that’s allowed it to maintain high profit margins while keeping a stable share of the market. The result is that this business has continued to generate plenty of spare cash each year, funding generous dividends.
Of course, this situation can’t last forever. The business needs to return to growth or else it could start losing market share. To return the business to growth, CEO Penny James has been investing in IT.
The group’s new technology is said to improve its product offerings and allow for more sophisticated pricing. I’d guess this means pricing risk more accurately, improving the profitability of each policy.
The company is also expanding into commercial insurance, where sales rose by 16% during the first quarter of this year.
I’m positive about the changes happening at Direct Line, so I’m happy to continue holding my shares and collecting an 8% yield. I think this high-yield stock looks cheap and should deliver attractive returns over the next few years.
Markets around the world are reeling from the coronavirus pandemic…
And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.
Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…
You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.
Roland Head owns shares of Direct Line Insurance and Evraz. 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.