What is a high-yield dividend stock? Well, a UK 10-year gilt yields about 3.4%. The average yield on the FTSE All-Share is 3.64%. I would like my high-yield picks to comfortably beat these two benchmarks so I am going to settle on around 5.5% and above. However, the higher the yield, the higher the risk.
As a stock price decreases, its yield increases. And stock prices tend to fall when the outlook for the company is souring. I don’t want to buy a stock promising a big dividend only to see it cut because it is unsustainable. While there are no guarantees in investing, certainly, there are some stocks that logically look like safer and sounder bets than others. So, to get me interested, a high-yield stock has to also offer a margin of safety.
Dividend cover
IG Group, a trading platform and products provider to retail and corporate customers, has a forward dividend yield of 5.8%. Its dividend cover is projected to be at least 2.15 throughout 2023 and 2024. That means it is forecasted to earn a little over twice what it pays out to shareholders. That is a good margin of safety, which makes this stock look like a safe and sound bet.
Stock in Redde Northgate, which rents, maintains, and manages vehicles for business customers, has a forward dividend yield of 5.7%. Its dividend cover is forecasted to be at least 2.15 throughout 2022 and 2023. Reach has a forward yield of 8.25%. That does look extreme, but dividend cover at the national and regional news publisher is forecasted to be at least 3.13 for this year and the next.
In addition to covering dividends well, all three of these have what look like manageable levels of debt. Debtholders get their interest payments before dividends are considered. So, for a dividend stock to look safe and sound I want to see its operating income at least 10 times higher than interest payments: IG Group, Redde, and Reach have interest cover well in excess of 10, which is encouraging.
High-yield stocks
I want my dividend stocks to generate more cash than they can invest back into the business. The best use of that surplus cash is to return it to shareholders. So I looked at cumulative free cash flow per share and dividends per share over the last five years. It is here that Redde drops out as it has paid out 102.8p per share in dividends and generated 72.1p in free cash flow cumulatively over five years. That leaves me with IG Group and Reach, which have generated surpluses of 262.9p and 87.57p respectively.
But, I won’t be buying them for my Stocks and Shares ISA just yet. Reach and IG Group are two high-yield British stocks that certainly look safe and sound based on a reasonable but simple screen. If it were that easy everyone would be doing it. Screens are good idea generators, but I need to do a lot more digging into the two businesses before I can be confident enough to buy.
