2 stocks I’d buy with dividends yielding more than 6%

These two top dividend stocks have strong yields and appear too attractive for me to pass up.

| 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.

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.

Finding the market’s best dividend stocks can be tricky. The most attractive income stocks have a high yield, but a higher than average dividend yield tends to be a sign that the market does not believe the payout is sustainable. So you usually have to be prepared to trade yield for safety. 

However, I’ve recently stumbled across two dividend stocks with yields of 6% that look safe even in the most adverse scenario. 

Returns of 1,700% in five years

Specialist accident management and niche insurance product provider Redde (LSE: REDD) has doubled its sales during the past five years. Shareholders have been well rewarded thanks to this growth. The stock is up 1,411% since year-end 2012, excluding dividends. 

Including dividends, the returns are even more impressive. Redde has consistently distributed around 100% of earnings per share to investors every year, and as a result, the yield on the shares has remained above 6%. Including these dividends, the total return has been 1,700% since year-end 2012. 

It looks as if the firm can keep this track record going. In a trading update published today ahead of the company’s AGM, management said the positive start to the financial year has continued and “as a consequence, trading profits are ahead of the corresponding period last year.” The announcement also confirmed the prospect of £17m or 5.6p per share for the dividend, the “12th consecutive dividend since June 2013. Payments since that date will amount to £105m representing 38p per share.

The key to dividends

Cash flows are the key to dividends. Luckily for investors, Redde is a cash cow. For fiscal 2017 the company generated a free cash flow of £43.6m before dividends. 

According to my numbers, payouts cost the company £30m, so the distributions were easily covered by cash generated from operations. Over the past five years, the firm has produced £171m in cash and paid out only £86m leaving plenty of headroom for other purposes. All in all, Redde looks like a top income stock to me. 

Despite concerns about its business model, Connect Group (LSE: CNCT) also appears to be generating mountains of cash. According to my figures, for fiscal 2016 the firm reported a free cash flow of £44m, easily covering dividends paid, which totalled £23m. The same trend can be seen for the past five years. The average free cash flow/dividend cover ratio for the company for the past five years is two times. 

Double-digit payout 

Concerns about Connect’s future have weighed on the company’s stock this year. The distribution company’s shares have lost around 40% of their value as investors bail out due to concerns about the firm’s ability to survive as paper sales slide. For the full year, City analysts are projecting a decline in earnings per share of 18%. 

Still,  even though Connect’s outlook is mixed, the shares trade at a bargain basement valuation of only 6.1 times forward earnings, which in my view more than makes up for the uncertainty. Connect also supports a dividend yield of 10.2%. 

As shown above, this distribution seems to be well covered and secure for the time being. So, despite worries to the contrary, Connect looks to be a great income share to me. 

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.

Rupert Hargreaves owns no share 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

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »