Cash ISA rates have been moving higher in line with the Bank of England increasing interest rates. Some fixed-term offers are now around the 4% mark. Even with this jump, I still prefer to allocate money to high-yield income stocks instead. Here’s why and also the specific ideas I like at the moment!
The case for high yield
I completely understand that my risk is much lower with a Cash ISA. I’m all but certain to receive the 4% yield and my capital back at the end of the term. With a stock, I’m not guaranteed any dividend payment. If the share price falls, I could also receive back less than my original investment when I sell.
However, the big difference is that I have unlimited upside with a dividend share. My yield might increase even after I’ve bought the stock if the dividend per share gets raised. Further, the share price could rally as well, giving me an even higher yield when I take this gain into account. With a Cash ISA, I have no upside potential.
What it boils down to is the risk versus reward. At the moment, there are several options in the FTSE 100 and FTSE 250 with dividend yields around 8%. If I can pick up double the yield of a Cash ISA, I’m happy to take on the added risk.
Dividend stocks with generous yields
Direct Line Group has a current yield of 10.4%. The share price has fallen by 19% over the past year. This is one reason why the yield is so high right now.
Part of the fall has come from rising claims inflation and falling premiums in the motor and home insurance market. However, in an update earlier this month, the business hasn’t downgraded the 2023 financial outlook (including dividend capacity). This gives me confidence for the future income payments.
Ashmore Group is an investment manager focused on emerging markets. Given the performance of stocks and bonds this year, it doesn’t surprise me that the share price is down 23% in the past year. This has helped to elevate the dividend yield to 7.31%.
However, I think this is a smart buy for me to consider now. Not only do I get to buy after the fall this year, but it also gives me exposure to something I normally couldn’t get as a retail investor. Some of the stocks and bonds owned by the company are very niche. When it comes to diversifying my money and trying to get uncorrelated returns, Ashmore Group could help me.
Managing my risk
Any high-yield stock does carry a larger amount of risk than a normal dividend stock. Usually, the share price has fallen recently, which boosts the dividend yield figure. The main concern I have to acknowledge is that if the business is likely to struggle in coming months, the dividend might be cut.
It’s not always the case that the business is in a really bad way. I feel the two examples will continue to pay out income despite the recent turbulence. As a result, I’ve put both stocks on my watchlist for when I have some spare cash shortly.
