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Is Neil Woodford’s 7.3%-yielding dividend stock Saga plc a ‘buy’?

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Neil Woodford has been having a tough time of late. Over the last year, his Equity Income fund has produced a return of just 0.8%. Investors would have been better off holding cash.

One reason Woodford has dramatically underperformed both the wider market, and many of his peers, is that several of his stocks have bombed out spectacularly.

Today, I’m looking at one such stock, Saga (LSE: SAGA). The shares currently have a yield of a whopping 7.3%. Are they worth buying for the big dividend?

High yield

I last covered the over-50s travel and insurance group back in mid-November. At the time, the company appeared to be cruising. Half-year results in September had revealed underlying pre-tax profit growth of 5.5%, with CEO Lance Batchelor stating: “Saga is growing, has good momentum, and is on track to deliver in line with expectations for the full year.” An 11% dividend hike gave me confidence in the outlook.

Things can change quickly, however. Fast forward to early December and Saga released a trading statement that saw its shares plummet 30%. The group’s profitability had been hit by a combination of the Monarch Airlines collapse and tougher conditions in its insurance business. Saga advised that underlying pre-tax profit for the full year was now expected to rise by just 1%-2%, with a decline of 5% pencilled in for FY2019.

The share price fall has left the stock on a P/E of just 9.2, with a yield of 7.3%. Good value?

Taking a long-term approach, I’m cautiously optimistic about Saga’s prospects. For a start, the dividend looks safe to me. The company said in December that it remains fully committed to its progressive dividend policy, with its aim being to pay out 50%- 70% of net earnings. With analysts forecasting earnings and dividends of 13.3p and 8.85p per share respectively for FY2018, the payout ratio would be 67% – within the target band.

To my mind, Saga looks to be the kind of stock you buy and tuck away for a few years. Profit growth may be subdued in the near term, but over the long term, the company looks well placed to capitalise from the UK’s ageing population.

Cash cow

Another Woodford-owned stock with a massive dividend yield is payment specialist PayPoint (LSE: PAY), which reported three-month like-for-like net revenue growth of 3.6% this morning.

Analysts currently expect a total dividend payout of 69p per share from Paypoint this year, putting the yield at 7.8%. Do the shares warrant attention then?

While Paypoint does appear to be a cash cow, income investors need to be aware that its dividends consist of both regular and special dividends. So while the group paid out an enormous 120.6p per share last year (which included a ‘disposal proceeds’ divi as well), only 45p of the distribution was the regular dividend.

The implication here is that investors shouldn’t take the ‘specials’ for granted. The company is unlikely to pay these consistently. If we look at the yield of the regular dividend, it’s around 5% – which is still healthy of course, and covered around 1.4 times.

Overall, I see PayPoint as a more ‘speculative’ income play. The company is clearly capable of paying out some large cash distributions, but these payouts may fluctuate over time.  

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of PayPoint. 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.