When it comes to building a second income through investing, dividend stocks remain one of the most reliable tools in the box. A well-diversified basket of companies with strong cash flows can provide a steady stream of income that grows alongside inflation.
However, it’s not enough to simply chase the highest yields on offer. A dividend needs to be sustainable, backed by a strong track record of payments and ideally supported by earnings growth.
Finding yields above 7% can be especially tempting, but investors need to be wary of ‘dividend traps’ – companies that pay big dividends until the moment profits falter and the payout’s slashed. With that in mind, I’ve been searching for opportunities where the headline yield looks attractive, but the fundamentals also stack up.
One small-cap insurer has caught my attention: Sabre Insurance Group (LSE: SBRE).
Specialist car insurance
Sabre Insurance Group’s a UK-based motor insurer that sells policies primarily through brokers, but also directly to the public via its Insure 2 Drive, Go Girl and Drive Smart brands. What makes it a little different from mainstream insurers is its focus on higher-risk drivers and specialist lines, including motorcycles and taxis.
This strategy requires more sophisticated underwriting, as the risks are more complex than standard car insurance. But the trade-off is higher profit margins.
Of course, there’s a flip side – the market for these specialised products is smaller, which could limit long-term growth prospects. Expanding into other areas would bring it into direct competition with giants such as Direct Line and Admiral. The share price, which is down nearly 46% over the past five years, arguably reflects this slower growth profile.
Strong income potential
Where Sabre does shine however, is in its appeal to income-focused investors. The dividend yield currently stands at an impressive 10%, with the next payout of 3.4p per share due on 24 September.
The payout ratio sits at just over 91%, which may seem high but isn’t unusual for insurers. More importantly, the dividend’s backed by a consistent record: seven years of payments and two years of consecutive growth.
The most recent growth figures are striking – the full-year dividend leapt from 4p per share in 2022 to 13p in 2024, an increase of 44% year on year. That’s a serious commitment to rewarding shareholders.
Is the business solid?
Looking under the bonnet, Sabre’s balance sheet shows no debt and assets comfortably covering its liabilities. Its net margin has doubled from 6% to 14% in just two years, while the price-to-earnings (P/E) ratio’s fallen from 24 to under 10, leaving the stock looking undervalued compared to peers.
Earnings have also beaten expectations for four years running, suggesting management has a good handle on underwriting risks.
So while the share price decline may give some investors pause, the company’s financial health and improving earnings picture make me more optimistic.
For those seeking to build a second income, Sabre looks like a reliable dividend-payer to consider, as it could help boost the average yield of a portfolio.
