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Forget the Royal Mail share price. I’d buy this FTSE 250 9% yielder today

The Royal Mail share price has fallen by 55% in one year and the stock now offers a forecast dividend yield of 9.5%. I share my colleague Harvey Jones’ view that the outlook remains uncertain for this 500-year old firm.

I can see better opportunities elsewhere in the FTSE 250. Today I want to look at another 9% dividend stock that I rate much more highly.

Bovis is bouncing back

FTSE 250 housebuilder Bovis Homes Group (LSE: BVS) has delivered a textbook recovery over the last couple of years. Since taking charge in April 2017, chief executive Greg Fitzgerald has lifted pre-tax profit from £114m to £168m.

Mr Fitzgerald has also fixed the company’s reputation for sloppy finishing. Bovis’s HBF customer satisfaction rating has risen from two stars in 2017 to four stars for 2018. Despite this investment in quality, operating profit margins have risen from 12.5% in 2017 to 16.4% in 2018.

Further gains are expected in 2019, and Mr Fitzgerald expects the group’s strong cash generation to continue. For shareholders, this is expected to result in a total dividend of 102.2p per share for 2019, giving a yield of 9.5%. A similar payout is expected in 2020.

Too good to last?

I don’t expect Bovis to be able to sustain such generous special dividends forever. But with earnings expected to rise by 6% this year and by 10% in 2020, I expect the dividend yield to remain above 5% unless market conditions get much worse.

Housing always carries some cyclical risk. But I see Bovis as attractively priced and operating well. I’d buy.

Profit from the silver pound?

Building retirement homes for wealthy retirees should be a profitable business. At least, that’s probably what investors thought when they bought shares in McCarthy & Stone (LSE: MCS) shortly after its 2015 flotation.

Unfortunately, things haven’t turned out that way. The shares now trade about 40% below their IPO price and the dividend hasn’t risen since 2017. Worse still, figures released today show that the group’s adjusted operating profit margin of 7.6% is less than half the 16% figure being achieved by Bovis Homes.

Are things getting better?

Today’s half-year results are a mixed bag, in my view.

The good news is that completions rose by 11% to 845 units during the first half of the year, while the average selling price climbed 7% to £319k. These gains lifted half-year revenue by 17% to £280.5m and boosted underlying operating profit from £14.5m to £21.3m.

On the other hand, the group admits that it’s having to use “discounts and incentives, particularly part-exchange”, due to challenging conditions in the wider housing market.

What could go wrong?

On average, the company says that £27.2m was tied up in part-exchange properties during the first half of the year. This figure is expected to rise to 10% of net assets — or about £74m — during the second half, according to today’s results.

In my view, that’s too much. The figure for Bovis was just 1.6% of net assets at the end of 2018. Although McCarthy shares now trade in line with their tangible net asset value of 126p, I’d want a discount before I’d take on this level of risk.

With the stock yielding just 4.2% and profit margins under pressure, I see better value elsewhere. I’d avoid.

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Roland Head owns shares of Bovis Homes Group and Royal Mail. 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.