When it comes to dividend investing, a 6% yield is often the perfect balance between high yield and risk. As a rule of thumb, yields above this level are more likely to be cut.
Most of my own portfolio is invested in high-yield stocks, and today I want to take a look at one of my recent purchases and at another 6%-yielder that’s on my radar.
I plan to hold forever
This is one stock I hope I won’t ever need to sell. Go-Ahead Group (LSE: GOG) operates buses and trains in the UK and in overseas markets including Australia, Germany, and Singapore.
In the UK, the group’s operations include 5,000 buses carrying over 2m passengers each day. Through its Govia Thameslink Railway and Southeastern franchises, it also carries roughly 30% of UK rail passengers every day.
One particular appeal of this business for me was its very strong and consistent free cash flow. This is used to fund a generous dividend which hasn’t been cut since the group’s flotation in 1995.
I may buy more
Although Go-Ahead seems unlikely to ever become a standout growth stock, its expansion overseas does provide an opportunity for growth. In the meantime, the firm’s large share of the UK market convinces me that its revenue should be fairly stable over the coming years.
After a difficult few years, performance has stabilised and the shares have started to edge higher. Forecasts for 2018/19 suggest the company will report earnings of 160p per share. This puts the stock on a modest forecast P/E of 10.6.
Analysts expect a dividend of 102p for the full year, giving the stock a well-covered yield of 6%. I may buy more in the coming weeks.
A better choice than house-builders?
The outlook for the UK property market is unavoidably tied up with Brexit, causing considerable uncertainty. But, as my colleague Royston Wild recently explained, the reality is that however Brexit pans out, the UK will still have a housing shortage.
In my opinion, this is one reason to consider investing in FTSE 250 firm Ibstock (LSE: IBST), which makes bricks and concrete products. This business is in the middle of a series of changes that I think should leave it strongly positioned for the future.
Firstly, the company has sold several pieces of surplus land this year, generating a one-off gain of £9.5m. Ibstock has also sold its US business, Glen-Gery, for a total of $110m. This is expected to generate a $95m cash inflow which will be used to repay a significant chunk of the group’s debt.
Back home, Ibstock’s brick factories are undergoing a period of enhanced maintenance after running at maximum capacity for a number of years. This could be a short-term headwind to sales growth, but should result in more reliable and profitable long-term performance.
A complete package
In my view, the changes under way at Ibstock this year should leave the group with well-invested factories, a strong balance sheet, and the capacity for growth. Although the outlook for the UK construction market is a little unclear at this time, as a long-term investment I think the shares look good value.
Analysts’ forecasts for 2018/19 put the stock on a forecast price/earnings ratio of 12 for 2019, with a prospective dividend yield of about 6%. I’d be happy to buy at this level.
