Today I’m going to look at two dividend stocks with forecast yields of more than 8%. Stocks such as these can be risky buys. Such high yields often indicate that the market sees problems ahead. A dividend cut is often inevitable.
However, there are certain situations where super-high yields are sustainable.
My first company, home and motor insurer Direct Line Insurance Group (LSE: DLG), is a stock I recently bought for my own portfolio. Analysts expect a total payout of 27.7p per share this year, including a special dividend. This gives the stock a forecast yield of 8.7%.
This high yield is just one of the reasons why I recently added Direct Line to my portfolio.
Why I’m a buyer
Direct Line’s share price has fallen by about 15% so far this year. Most other insurance stocks have also fallen as investors have fretted about risks such as rising interest rates, tough competition and increasing claims.
Despite these pressures, profit forecasts for this well-known firm have remained relatively stable. The latest consensus earnings forecasts for 2018 are only 3% lower than they were one year ago.
In a trading statement today, the firm said that gross written premiums — the amount charged for new policies — fell by 5.8% to £854.5m during Q3. However, the number of in-force policies only fell by 3.8% to 15,183. This implies that the average premium per policy fell during the period.
This decline was largely as expected, and chief executive Paul Geddes confirmed that he still expects the business to meet its 2018 targets.
I’m comfortable with this situation and plan to continue holding. With a history of high returns and good cash generation, I rate these shares as a buy.
Is this 9.2% yield for real?
Has Crest’s recent year-end trading update changed my view? Perhaps. The news still wasn’t very good, as the group’s focus on London and the South East has left it exposed to slowing sales in this region. Sales volumes and profit margins are now both expected to be below previous guidance.
One to avoid?
In this context, the stock’s 2018 forecast dividend yield of 9.2% might seem risky. But the company is shifting its strategy to protect shareholder returns.
Bulk sales of housing to rental landlords will be accelerated, while building rates will be slowed to better match demand. In the meantime, the firm plans to shift production towards cheaper houses and find other ways to cut costs.
Together, Crest’s management expects these changes to enable this year’s 33p dividend to be repeated in 2019.
Analysts’ forecasts suggest that this payout should be covered about 1.8 times by earnings in both 2018 and 2019. If the firm’s strategic shift delivers stable profits, then this 9% yield could be sustainable.
Crest Nicholson stock isn’t without risk, but I think the shares are probably fairly priced at this level. I’d continue holding, for now.
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Roland Head owns shares of Direct Line Insurance. 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.