The Motley Fool

Who cares about Lloyds’ dividends?! I’d rather buy this FTSE 250 stock’s bigger 10% yields

In a recent piece, I explained why a concoction of great political and economic uncertainty, combined with the likelihood of low interest rates persisting well into the next decade, have dissuaded me from investing in Lloyds Banking Group today.

Sure, the FTSE 100 bank might offer some huge dividends — at the current time investors can grab hold of a chunky yield just shy of 6% — but why take a risk here when there’s many other big-paying blue-chips to buy today?

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

A better dividend buy

One share I’d much rather get my hands on right now is Direct Line Insurance Group (LSE: DLG), and fresh financials in the middle of last week showed exactly why.

Everyone knows how ultra-competitive the motor insurance segment is in particular, but Direct Line is still managing to win increasing amounts of business, thanks in no small part to the massive investment it’s made in its brands in recent times. Such measures helped gross written premiums from British drivers edge 0.3% higher between June and September, to £457.8m.

Promisingly too, the insurance colossus advised that “although we are only halfway through Q4, the improving trends have continued.

Motor revs up

Admittedly, Direct Line’s performance in the last three-month period can hardly be described as heart stopping. However, this needs to be seen in the context of the massive challenges the FTSE 250 firm has experienced recently. Gross written premiums at Motor slipped 4.7% in the first half because of a mix of lower volumes and a reduced risk mix which pushed down customer premiums.

Direct Line also needs to be lauded for the efforts it’s made to embrace the colossal opportunities afforded by price comparison websites. As the business itself noted, these websites “are the biggest market for new business in the UK and are a key route for profitable growth.”

And the improved performance of the third quarter was down to strong demand for its Churchill-branded policies on the likes of Moneysupermarket.

It’s worth noting the contribution made by Direct Line’s other divisions in the past quarter too. Gross written premiums from its Home products may have ducked 4.9% year-on-year but premiums from Commercial and Rescue & other personal lines rose 5.3% and 3.5% respectively. And, as a consequence, group gross written premiums rose 0.4% to £858m.

Yields approach 10%!

As I said though, the UK insurance sector is intensively competitive and so Direct Line needs to keep pedalling furiously to keep the bottom line growing. Pleasingly then, the business announced it was launching a fresh cost-cutting drive to reduce operating expenses by £50m and to get its operating expense ratio to 20% by the close of 2023.

Now City analysts expect the insurer to follow a predicted 17% earnings fall in 2019 with another 3% drop next year. But in view of its improved trading momentum and those cost-saving measures, I reckon 2020’s estimates could be revised sharply higher.

What’s more, at current prices, Direct Line trades at a rock-bottom forward P/E ratio of 10.5 times and carries monster dividend yields of 9.5% for 2019 and 9.8% for next year too.

Those seeking huge income flows from their shares portfolio clearly need to pay Direct Line close attention.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.

Simply click here for your free copy.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking 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.