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3 High-Yielding Stocks On The Up: Royal Mail Plc, Direct Line Insurance Group Plc And BP plc

Some of the most difficult decisions that we face as investors are:

  • Buying stocks at or near new highs;
  • Whether to sell a stock because the story has changed;
  • Holding a stock that is being punished by the market;
  • Buying a stock that is currently out of favour.

Today, I’m going to take a look at three stocks bouncing from current lows, and whether they still make for a good investment today – so let’s dive straight in…

Royal Mail Group…

Once the darlings of the IPOs seen in 2013, the iconic Royal Mail (LSE: RMG) shares peaked at over 600p. Sadly, a combination of market volatility and questions surrounding its profitability caused the shares to slump to around 400p.

But since the turn of the year, the shares have sprung back to life, currently exchanging hands at over 520p per share. But has the story changed?

In a word: no.  The group still highlights several issues going forward — known knowns, if you will.  These include:

  • Declining letter volumes;
  • Intense competition in the parcel delivery space;
  • Competition from competitors, able to cherry-pick the most profitable areas for letter delivery.

Whilst it is clear that the threats to the business have not gone away, I think that the market and some analysts were overly worried and the shares were marked down too low. Indeed, there are still opportunities to leverage its UK-wide network with the growth in online retail and control costs. Should management be able to keep relations with the unions stable, I can see the shares rising further from here.

Direct Line Group…

Most famous for its red telephone on wheels and that annoying nodding dog, Direct Line (LSE: DLG) owns some recognisable brands, now including Winston “The Fixer” Wolf.

In addition to the main Direct Line telephone and online insurance brand, the Direct Line Group also operates the Churchill, Privilege insurance brands and the Green Flag breakdown assistance business.

Direct Line is one of the UK’s biggest insurers, with a UK personal motor insurance market share in the region of 14% and a UK home insurance market share of around 17% — that’s good for third place.

So what has got the market excited about the shares?

It is quite possibly down to the cost base being well managed, with total costs down by over 10% in the first quarter of 2015, combined with the previously announced sale of the International division, expected to complete in the second quarter. On completion, the group expects to announce a special dividend reflecting almost all of the net proceeds of the sale, conditional on shareholder approval of a share consolidation.  Management will continue their efforts to reduce costs, thus assisting profit growth over the next two years. Earnings per share and dividends (excluding the special dividend) are forecast to rise steadily in 2015 and 2016.

And Finally BP…

Proponents for BP (LSE: BP) believe that analysts have been too pessimistic about the shares – this seems to chime with Royal Dutch Shell, with both of these diversified oil and gas operators beating expectations in the first quarter of 2015. In particular, BP posted earnings excluding exceptional items of $3.2 billion in the first three months of 2015.  Whilst that was down 56% on the $7.3 billion made in Q1 2014, the City had been expecting a drop to about $2.5 billion…

The price of oil has staged a recovery since the apparent lows seen at the start of this year, with Brent crude hovering over $60 per barrel.  Investors who feel that the price of oil has indeed bottomed and may rise could be getting in at a decent price, as the shares have lost a little ground since the start of May.  The shares could be a steal, too, especially if a bidder should decide to snap up the company, with analysts pointing towards a possible price around 700p, should a similar 50% premium be given, as was the case with Shell’s bid for BG Group.

Conclusion

As can be seen from the chart below, investors who were brave enough to buy these shares when the market sentiment was negative would have prospered.

DS

Even now, whilst the shares mentioned here don’t scream cheap, they do provide holders with a market-beating yield. And for those of us prepared to accept some volatility, a regular — and in some cases, growing — income, these are the types of stocks that keep you warm at night.

For those of us searching for yield, one of the best tried-and-tested methods is to adopt an approach towards a more diversified portfolio, tailored towards solid income-producing stocks -- the sort that can make money whatever the weather.

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Dave Sullivan does not own shares in any of the companies mentioned. The Motley Fool does not own shares in any of the companies mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.