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This FTSE 250 income stock’s dividend yield has my attention

Income from dividends can be spent, or perhaps used to buy more shares that pay dividends that can buy more…you get the picture. Quality shares that pay out a high proportion of the price paid as dividends each year (a high dividend yield) have a place in my portfolio, and I am always on the lookout for others.

Brewin Dolphin (LSE: BRW), an investment management and financial planning firm, currently offers a dividend yield of 5.3% for the price of 310 pence per share, taking the last total annual dividend of 16.4 pence per share as our reference. That is an attractive yield, but I would like to be confident that the dividend will not likely be cut, that it is sustainable, and that prospects for growth are there.

The company has a clear policy to pay 60-80% of adjusted diluted earnings as dividends. Since 15% or so of revenue is reported as earnings, if revenue is sustainably growing, then dividends can grow. Brewin charges fees on assets under management and advisement, and collects payments for financial planning services. These are the big, ongoing revenue sources.

Since the first quarter of 2017 to the third quarter of 2019 — the most recent of which ended in June — financial planning revenue has grown by an average of 4.8% per period. Assets under discretionary management — by far the largest source of income — have grown by 2.68% per quarter on average, over the same period. More assets mean higher revenues as management fees are charged on a percentage basis and higher earnings.

Clients will be encouraged to hand over more of their money, or at least not withdraw it, as Brewin has done 0.5% better than the benchmark selected to measure its asset management skill against since the first quarter of 2017 until the most recent. This may not seem like much, but it is positive even after clients have had fees deducted, and perhaps clients will be more impressed by the 3.7% outperformance of the FTSE 100 for the same period – that is likely a more familiar benchmark for them, and the outperformance was achieved with less volatility.

The 2019 interim dividend has already been maintained, and the latest quarterly trading update was positive despite tough economic and market conditions. Even though clients are increasingly trusting Brewin for financial planning advice, and seeing their assets managed responsibly, I expect that dividends will be maintained until conditions improve. The company did this during the financial crisis towards the end of the last decade and maintenance is more palatable to investors than a cut. A 5.3% yield is still attractive, and bear in mind even a 25% cut in the dividend would still deliver a 4% yield, which is not bad at all.

I would be happy with a maintained dividend, as the track record gives me confidence that can be grown when conditions improve. A company insider bought 33,118 shares of the stock in late August 2019; perhaps they share my confidence?

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James J. McCombie has no position in this stock. 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.