The grind of January is now behind us, with February here with knowledge that the year is now properly off and running. As I mentioned last month, one of my key aims for 2022 is to enhance the yield on my income portfolio by picking top dividend stocks. With high inflation along with weak cash rate returns, here’s where I’d look to invest £500 this month.
A top dividend stock with a high yield
The first company I’d invest in is Direct Line Insurance Group (LSE:DLG). It currently has a dividend yield of 7.31%, with the share price gaining 1.67% over the past year.
The primary operation of the business is insurance. Motor insurance is the highest revenue division, followed by home and then rescue and other personal lines. The full-year results are due out later this week for 2021, although the Q3 results from November give a good indication of how the year worked out.
Total group revenue came in at £857.1m, up 0.7% on the same quarter last year. For the nine months through to the end of September, revenue was down 0.8% on the previous period in 2020. I don’t see this as much of an issue, as it highlights the steady (if not spectacular) demand from the insurance market.
When looking for a reliable dividend stock, it always helps to have a company that has a low risk business model with good cash generation. For me, Direct Line ticks this box.
In terms of risks, profits might suffer due to the new pricing policy brought in by the FCA. It means providers need to be much clearer on costs to customers, as well as giving customers the ability to opt out of auto-renewal.
Strong growth in dividends over decades
The second top dividend stock for February that I like is National Grid (LSE:NG). The stock has a dividend yield of 4.57% and has returned an impressive 27% over the past year.
One thing that I’ve noted for the business is that the company has grown the dividend per share for the past 22 years. One of the reasons for this is the fact that it operates as an established business in a mature market. It owns and operates a large electricity transmission network in the UK, as well as some operations in the US.
Part of the gains in the share price over the past year are thanks to higher profits due to the acquisition of WPD. The entity is the UK’s biggest electricity distribution business. The economies of scale gained from this helped to push half-year pretax profits to £1.08bn, up 86%.
However, it’s not all plain sailing for the top dividend stock. It has the same risk as Direct Line in that the regulators are trying to tighten up things. Last year, National Grid appealed the latest changes to the regulatory framework due to concerns over the cuts to investor returns.