For investors like me, it is great to find income generating stocks that have high dividend yields. But it is even better when these stocks suggest long-term dividends. Typically I assess a company’s dividend sustainability by considering its past trends. There are plenty of both FTSE 100 and FTSE 250 stocks that have had a pretty consistent dividend policy. And that is exactly the category in which I found this stock.
FTSE 250 stock with an almost 8% dividend yield
I am talking about the FTSE 250 insurer Direct Line Insurance (LSE: DLG), which has a dividend yield of 7.9%. This is good by any standard, but particularly so considering that the average FTSE 250 yield right now is only 1.9%. In other words, this stock provides income that is a whole 6 percentage points higher than that of the average FTSE 250 stock.
Moreover, this gives me significant inflation cover as well. Just as I do not see the point in putting my savings into low interest rate paying cash ISAs, there is also little point in buying stocks that earn me small dividends. Especially as inflation has risen above 3% in the past couple of months and the average annual rate of price rise will be higher than last year. So I want to make my investments with greater care to ensure I earn real returns.
And it is not just that the company had paid strong dividends in the last year alone. It has paid dividends for much of the past decade. Even better is the fact that its dividend yield has been higher than 5% for much of the past five years. Its dividend yield has averaged 5.4% over the past five years.
Improving results for Direct Line Insurance
Besides this, I also like the stock for its latest results. In the past few years, Direct Line Insurance has seen a steady decline in net profits. But profits for the first half of 2021 give reason for hope that things maybe changing for the company. Its net profits are up almost 6% from the same time last year. The company has been taking steps towards becoming more digital-friendly, which seems to be paying off. It also has a confident outlook, which is encouraging. All of this suggests to me that the company’s dividends can continue.
What I’d do
The one downer to the stock, however, is that its share price is going nowhere. Over the past year, it has fluctuated a lot in a range, but if I compare point to point, I would have made absolutely no capital gains on it if I had invested in the stock last year on this day. In fact, if I had invested three years ago, my capital would have been reduced since its share price has fallen.
But then again, exactly this reason makes it a cheap stock. Also, considering that the economy is getting back on track, I reckon that motor insurance should do better business, which is also the company’s largest revenue source. Its structural transformation also seems to be going well. I have bought the stock and intend to hold it, if not load up on it some more with an extra £500.
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Manika Premsingh owns shares of Direct Line Insurance Group. 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.