Keeping your savings in a Cash ISA may seem like a safe choice. But with a top interest rate of less than 1.5% for instant access accounts, you’re paying a high price for this security. I prefer to keep most of my cash in the stock market, invested in high-yield dividend stocks.
My preference for dividend income isn’t just a coincidence. There’s plenty of evidence to show that over longer periods, dividends often deliver the majority of stock market returns. For example, the FTSE 100 has risen by 10% over the last five years. But the FTSE 100 total return index — which includes dividends — has risen 35%.
Investing in ultra-high yield stocks isn’t without risk. But here, I’m going to look at two stocks with yields of more than 8% that I’d happily to buy today.
Earn 9.7% from this FTSE 250 pick
My first pick is a stock I own myself, Direct Line Insurance Group (LSE: DLG). The UK motor insurance sector is struggling with rising claims costs and a very competitive market at the moment. The Direct Line share price has fallen by about 11% so far this year, reflecting a very cautious outlook.
However, the business has a strong brand and a big market share. Historically, it’s generated attractive profit margins and generous cash returns for shareholders.
Broker forecasts indicate the group’s generous cash returns are expected to continue. A total dividend payout of 26.1p per share is pencilled in for 2019, giving a forecast dividend yield of 9.7%. That’s very high and, to be frank, I think there’s a risk the payout will fall next year. However, I’m not too concerned by this.
A 30% cut to the payout would still give a dividend yield of 6.7%. That’s well above the FTSE 100 average of 4.5%. I remain a long-term buyer of Direct Line and may add to my holdings in the coming weeks.
A gift at this price?
My second pick is FTSE 250 retailer Card Factory (LSE: CARD). This high street stalwart sells budget greetings cards and related items. It’s popular with customers and has been a reliable performer for some years.
Card Factory’s business is also unusually profitable for a retailer, thanks to its vertically-integrated business model. This sees the firm do virtually all production in-house — including design, manufacturing and warehousing. It operates from about 1,000 stores and has a growing online business.
It’s not all good news, however. Tough trading conditions on the high street and a fairly mature business mean Card Factory has struggled to deliver any real growth in recent years.
Today’s third-quarter trading update illustrates this. Although sales for the year-to-date have risen 5%, this was mostly down to new store openings. Like-for-like sales rose by just 0.9%, which is less than inflation. This suggests to me same-store sales are flat, at best.
Despite this, full-year results are expected to be in line with broker forecasts. These put the stock on a price/earnings ratio of nine, with a dividend yield of 8.5%. Past performance suggests this payout will be covered by free cash flow and hence should be affordable.
I feel this low valuation could be a good opportunity for income investors. I may add the stock to my own portfolio in the coming months.
Roland Head owns shares of Direct Line Insurance. The Motley Fool UK owns shares of Card Factory. 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.