These high-yield British stocks look like safe and sound bets

There’s no point buying a stock for a high-yield only to run right into a dividend cut. So I screen stocks for safety as well as yield.

| 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.

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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 assessed. Consider taking independent financial advice.

James McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

UK investors are piling into Vodafone! Should I buy this FTSE 100 stock?

This ultra-cheap FTSE 100 dividend stock has been very popular among retail investors lately. What might they be seeing in…

Read more »

Market Movers

This FTSE 250 value stock is up 11% today! Here’s what’s going on

Jon Smith explains why a FTSE 250 stalwart is shooting higher today on fresh news and talks through why this…

Read more »

Inflation in newspapers
Investing Articles

£276bn worth of reasons to invest in UK shares?

Our writer prefers investing in UK shares to holding cash. However, he acknowledges that this approach does carry some risks.

Read more »

Investing Articles

Here’s the latest growth and share price forecasts for Nvidia stock

Nvidia is due to report Q4 results towards the end of February. Should I buy the stock in anticipation of…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Is the party over for the S&P 500 as Trump’s tariffs loom?

Donald Trump's planned tariffs have cast doubts on the future performance of the S&P 500. What should investors do now?

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Warren Buffett continues to invest in this well-known pizza company

Warren Buffett just bought another 1.1m shares in Domino’s Pizza. Should investors follow him into the well-known fast food company…

Read more »

Investing Articles

A £100 weekly income from a Stocks and Shares ISA? It’s possible!

Mark Hartley details how a combination of good stock picks and patience could transform a Stocks and Shares ISA into…

Read more »

Young black colleagues high-fiving each other at work
US Stock

Why Apple stock could be set to soar with the new Alibaba partnership

Jon Smith explains why a new deal relating to the Chinese market could be good news for Apple stock, not…

Read more »