Passive income is the holy grail of investing for many, including myself. Dividend stocks form the core part of my portfolio, providing me with a regular source of income through dividend payments.
When looking for dividend stocks, I want to see companies with solid records of rewarding customers. And I believe now is a good time to buy. Share prices have fallen across the board and it’s largely the case that the FTSE 100 has been hauled upwards by surging resource stocks.
And when share prices fall, yields are pushed upwards. In fact, there are some truly sizeable yields out there right now although it certainly pays to be wary of large dividends. Today, I’m looking at Direct Line (LSE:DLG).
Dividend offering
With the share price falling, Direct Line now offers a 12% dividend yield. That’s huge and considerably larger than the index average. That means if I bought just over 3,000 shares in Direct Line, I could expect £720 in return throughout the year, or £60 a month.
The coverage ratio — a financial metric that measures the number of times a company can pay dividends to its shareholders from earnings — was 1.08 in 2021 and 1.17 in 2020. That’s not a particularly strong ratio, although anything above one demonstrates it has the capacity to pay shareholders its declared dividends.
However, it’s important to remember that dividends are not guaranteed. But despite performance lagging in 2022, Direct Line has increased its dividend payout seven times over the past 10 years.
Performance
Direct Line noted a 31.8% decline in first-half pre-tax profit in H1 as it took a hit from claims inflation. Pre-tax profit fell to £178.1m from £261.3m in the first half a year earlier, although this was ahead of consensus expectations of £155m. Chief executive Penny James has admitted the firm was caught out by surging inflation and was too slow to increase its prices.
But the group appears to have rectified the issues that caused H1 profits to tank. Direct Line says that through steps taken within its garage network, as well as pushing up prices, it has returned to writing at target margins “based on latest claims assumptions“. Also, in the near term, higher interest rates should be beneficial for insurers, as they should be able to earn higher returns from investing their premium cash.
Stability
Direct Line operates in a fairly boring area of the market, and that’s great. Demand is relatively stable — regardless of a possible recession, people will still need or want to insure their homes and vehicles — and proven operators, like Direct Line, have enough experience to price risks at the right level. It’s also a company that avoids the more exotic areas of the market and remains highly profitable.
I’ve recently added Direct Line shares to my portfolio — not quite 3,000 yet. But with its solid dividend track record, I’m hoping it will boost my portfolio’s passive income earnings going forward.
