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.