Shares to invest in: an 8% yielder I’d buy

Our writer explains why this high-yielding financial services stock is on his list of shares to invest in now for his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

As I look for shares to invest that could boost my dividend income, I’m considering insurer Direct Line (LSE: DLG). Its yield is currently around 8%, and on top of that it has occasionally paid special dividends.

I like the stock but I have a couple of concerns too. 

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

Insurers as dividend shares

Insurers are often attractive from an income perspective. They tend to have fairly robust cash flows. Profits can jump around depending on claims levels and competitive activity hurting pricing, but typically insurance is a profitable business. That can help fund juicy dividends. 

My focus here is on income, not growth, and there’s no way Direct Line could be called a growth share. Indeed, over the past year, the share price has shed 11%. But if I wanted to buy the shares for their yield, a cheaper purchase price actually makes them more compelling to me. I just have to do my research to try to reassure myself that they won’t fall further. As the yield gets higher, I think more investors will be tempted to buy the shares. That, along with solid business performance, could help support the share price.

Direct Line as a business

My research has shown me that a risk for an insurance company is maintaining a competitive advantage. For many customers, insurance is an unwelcome necessity, though it may provide peace of mind. That means that it’s more likely that potential purchasers treat insurance as a commodity, making choices based solely on price. Online price comparison has made that approach easier.

There are a couple of ways in which an insurer could try to meet this threat to pricing power. One would be to compete on something other than price, such as service. Another would be to build a strong brand that could help engender customer loyalty. That’s exactly what I think Direct Line has done over many years, along with rivals like Admiral. That makes it more attractive to me as a company. I think it could help sustain the company’s profitability in future.

As well as the eponymous Direct Line brand, the company owns well-known insurers such as Churchill and Green Flag. That gives it the ability to target different segments of the insurance market. That could help it grow earnings, to support the dividend in future.

So do I think these are shares to invest in?

There are risks with a company like Direct Line. Recently it warned that rising second hand car prices could push up the cost of settling claims. That might dent profits.

Another risk is capital loss. The 8% yield is attractive to me, but the long-term decline in Direct Line’s share price could effectively wipe out much of the benefit if it continues. That could happen if the company’s profitability comes under pressure, for example from increased competition online.

But there aren’t many large companies yielding over 8%. I like the outlook for the Direct Line business and think it can sustain its dividend in coming years. There are other insurers I like for similar reasons. But I would include Direct Line on my list of shares to invest in now for its potential to boost the dividend performance of my portfolio.

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

Make no mistake… inflation is coming.

Some people are running scared, but there’s one thing we believe we should avoid doing at all costs when inflation hits… and that’s doing nothing.

Money that just sits in the bank can often lose value each and every year. But to savvy savers and investors, where to consider putting their money is the million-dollar question.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

…because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group. 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Young brown woman delighted with what she sees on her screen
Investing Articles

3 signs that shares could be set for a new bull market

Stock markets are cyclical, and investors go through phases of buying and selling. How can we best deal with the…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I plan to make passive income with just £3 a day

There are multiple ways to make passive income in 2022, but our writer considers a popular method that involves dividend…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

Lloyds shares are down 10% in 2022. What next?

Lloyds shares have dropped by almost a tenth so far in 2022. But the bank is in good shape to…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How to aim to use the Warren Buffett method to make a million, starting today

Why do investors love Warren Buffett so much? His 3.6 million percent investment return since 1965 probably has a lot…

Read more »

Various denominations of notes in a pile
Investing Articles

3 big income stocks hiding in plain sight

There are plenty of high-paying income stocks flying under the radar right now. Paul Summers offers three examples he likes.

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

2 FTSE 100 shares I’m buying in July

Andrew Woods wonders whether these two FTSE 100 shares could bring growth to his portfolio and if he should add…

Read more »

positive mental health woman
Investing Articles

2 dirt-cheap stocks investors should buy to hold until 2030!

Recent market volatility means lots of UK shares now offer brilliant value. Here are two ultra-cheap stocks on my radar…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

My top 7 dividend shares to buy as inflation soars

Dividend shares can be an excellent way to earn some passive income. Our writer considers seven top picks to help…

Read more »