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Forget 1.5% from a savings account. I’d rather have FTSE 250-member Saga’s 8% dividend yield

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The release of the 1.5% Marcus savings account has been met with increased optimism that life for savers may improve. After a decade of low savings rates, though, the reality is that further pain could be ahead, with the account still lagging inflation when it comes to an income return.

As such, FTSE 250 shares such as Saga (LSE: SAGA) could offer income investing appeal. The company has a dividend yield of around 8% at the present time, with there being scope for its dividend payout to rise over the medium term. Alongside another dividend growth stock which released an update on Tuesday, it could be worth buying in my opinion.

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Improving outlook

The stock in question is industrial thread manufacturer Coats (LSE: COA). Its trading update showed that group sales for the July to October period increased by 3% on a constant currency basis. Its Industrial division saw improving momentum, with sales rising by 9%. This was underpinned by higher growth rates in both the Apparel and Footwear segments, as well as the Performance Materials business.

The company’s performance was relatively strong in spite of mixed demand from retailers, with strong momentum in Asia helping to offset this. A focus on product innovation and digital solutions could help it to continue outperforming the wider market.

With Coats due to report a rise in earnings of 16% in the current year, followed by further growth of 8% next year, its dividend could rise at a rapid rate. Although it only yields 1.7% at the present time, dividends are covered 4.5 times by profit and are expected to grow by 10% next year. As such, the stock could become increasingly appealing from an income perspective.

High yield

Of course, Saga’s 8% dividend yield is one of the highest in the FTSE 250 at the present time. The stock has endured a challenging year, with difficult operating conditions causing its financial outlook to deteriorate. In the current year, for example, it is expected to report a fall in earnings of 5%, followed by disappointing growth of 2% next year. This could mean that dividend growth is somewhat lacking over the medium term.

One reason for its slowing profit growth outlook is increased competition. The company is finding it harder, and more expensive, to win new business in what is a challenging wider market. And with there being the potential for weakening consumer confidence as the Brexit process moves ahead, its financial prospects may remain relatively downbeat.

Despite this, Saga could offer impressive total returns in the long run. The company has a price-to-earnings (P/E) ratio of 8.5. This rating factors in its forecast decline in earnings in the current year, and could suggest that it offers a wide margin of safety. And with a high yield to provide an impressive total return on its own in the meantime, the stock may be able to generate significantly higher returns than a savings account.

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Peter Stephens owns shares of Saga. The Motley Fool UK has recommended Coats Group. 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.

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