Falling share prices have boosted the income available from two of my favourite dividend shares. Both of these stocks now offer a forecast yield of 9% for the current year.
I already hold both of these shares, but I’m thinking about adding to my positions in July. The surging cost of living means that I’m keen to increase my passive income. And I reckon both of these companies are likely to deliver long-term gains from current levels.
Direct Line: a big dividend share
FTSE 250 insurer Direct Line Insurance Group (LSE: DLG) is a well-known UK motor and home insurer. The company also has a fast-growing business insurance operation and owns breakdown operator Green Flag.
I’ve held Direct Line shares in my portfolio for several years. They’ve provided me with some of the biggest dividend payments I’ve ever received.
One downside is that growth has been minimal. The UK insurance market has been a tough place to be, with strong competition and aggressive pricing.
Claims costs have risen too. Rather than slashing prices to win new business, Direct Line CEO Penny James has chosen to invest in new technology and stay disciplined on pricing.
Hidden value?
I believe this long-term focus should start to pay off as market conditions stabilise. But I have to admit that evidence is mixed so far. Direct Line’s pre-tax profit was flat last year, at around £450m. Policy numbers were also largely unchanged too, at 14.6m.
Fortunately, Direct Line’s impressive profitability continued to support generous dividends. The company generated a return on tangible equity of almost 24% last year, driving strong cash generation.
My research suggests that rising interest rates and new UK rules on pricing are likely to favour larger insurers like Direct Line over time.
With a dividend yield of 9% expected for 2022, I’m happy to remain patient. Indeed, I may add to my holding this summer to take advantage of the current weakness.
Somero Enterprises: essential tech for retailers
Huge retail warehouses are an increasingly common sight in most western countries. But the high racking and automated handling systems installed inside them can only be used if the floor is perfectly level.
AIM stock Somero Enterprises (LSE: SOM) is a market leader in this area. This US company produces the equipment needed to pour perfectly flat concrete floors of almost any size. Many of the company’s larger units are laser-guided and far more accurate than traditional techniques.
Somero also offers training and round-the-clock support for its equipment and will fly technicians to customer sites when needed. People I know who work in this sector say it’s a very well-respected business.
Somero’s share price has fallen since the start of the year as investors have priced in the risk of a recession. There is certainly some risk that an economic slowdown will hit construction activity and cause profits to drop.
However, the company’s latest trading update reported “healthy” market conditions and solid demand so far this year. Somero is also debt-free and carries plenty of surplus cash.
Broker forecasts price the stock on just eight times forecast earnings, with a dividend yield of 9.8%. Somero shares look good value to me at this level.
