As an income-focused investor, I’m always looking for high-yield dividend stocks with sustainable payouts. One thing I do regularly is to browse the FTSE 250 for dividend opportunities.
Today, I’m looking at two FTSE 250 stocks with dividend yields of at least 6%. I reckon both could be good buys for my Stocks and Shares ISA.
Go direct for an 8% yield
Direct Line Insurance Group (LSE: DLG) is known for its direct business model. Ever since its launch in 1985, the company has focused on selling directly to customers under its main signature brand.
These days, Direct Line Group also owns the Churchill and Privilege brands. These are sold through price comparison, giving the company a foot in both camps.
Direct Line’s size and experience means it enjoys some economies of scale. It also has plenty of data about UK driving habits. Under CEO Penny James, the company has been investing in new software to allow it to price insurance more accurately — and more profitably.
The pandemic caused some disruption at this FTSE 250 firm. But management admits the company also benefited from fewer motor claims during lockdown. Less driving meant fewer crashes and fewer costly claims.
Direct Line’s pre-tax profit fell by 11% to £451m last year, but this didn’t prevent the company increasing its dividend for the year by 2%, to 22.1p per share. This gives the stock a dividend yield of 7.1%, at current levels.
My main concern with this business is it’s struggled to grow in recent years. The motor insurance market is competitive, making it hard to hike prices. I believe Direct Line’s brands should provide a long-term advantage, but I could be wrong.
Broker forecasts suggest Direct Line will pay a dividend of 25p per share in 2021, giving a yield of 8%. I already own the stock, but if I didn’t, I’d probably be buying it at current levels.
A surprise FTSE 250 winner
When the pandemic struck last year, shares in iron ore group Ferrexpo (LSE: FXPO) crashed to a low of under 100p. Over the 12 months since then, the stock has risen by 260%.
After such a rapid gain I’d often lose interest. But Ferrexpo still looks quite reasonably priced to me, trading on less than six times forecast earnings. I believe the shares could still deliver attractive returns for my portfolio.
Ferrexpo’s latest results show sales rose 13% to $1.7bn last year, thanks to strong prices and higher production levels. Pre-tax profit rose 50% to $754m. This is a good example of how miners can benefit from rising commodity prices.
However, the opposite can also happen. Iron ore prices are high at the moment. Ferrexpo’s management expect strong demand for its particular blend of iron ore to continue in 2021, but there’s no guarantee of this. A slump in iron ore prices could see earnings fall sharply this year.
For me, this is a risk worth taking. Ferrexpo’s production costs are quite low, and the company’s operating profit margin has averaged 29% since 2014. I expect it to remain profitable in almost any market environment and trust management to maintain its record of returning cash to shareholders.
City forecasts suggest Ferrexpo will pay dividends of around 35 cents per share in 2021, giving a forecast yield of 7%. I’m tempted to add this FTSE 250 stock to my portfolio.
