If you’re considering investing in Bitcoin, that suggests to me that you like a bit of risk and you’re not too worried about safety. Bitcoin is a very risky investment. In fact, to me it’s not an investment at all, it’s a pure gamble, a very risky gamble.
Bitcoin generates no new wealth and provides no income stream. It only transfers wealth between individuals, on the ‘greater fool’ theory that someone else will come along later and pay more for it. Admittedly, the Bitcoin price has been rising in 2019, but it’s nowhere near its earlier $19,000 peak, and there’s no rational way to predict where it will be in 10 years’ time.
Special dividends
The insurance business carries short-term risk, but I think an investment in Direct Line Insurance Group (LSE: DLG) carries a lot less risk than Bitcoin, and has significantly better long-term potential. It’s in a relatively simple segment of the business, offering general retail insurance — including motor insurance, home insurance, travel insurance.
It’s generating lots of cash which it is handing over as dividends. Last year, the total ordinary dividend represented a yield of 5.7% on the year-end share price, and there was a special dividend yielding an extra 2.2% too.
Forecasts are predicting a total dividend of 8.4% this year, and the shares are on a forward P/E of 12. I think that’s a very attractive yield from shares on an undemanding valuation, and I’d be seriously considering buying some if I wasn’t already invested in the insurance sector.
Increasing claims are forecast to lower earnings per share by 13% in 2019, but that’s something no company has any control over and which they simply have to suck up. I think Direct line, being one of the biggest motor insurers in the country, can handle it better than most — and anyway, the valuation already takes the expected dip into account.
Hmm, maybe I will expand my insurance holdings after all.
Shareholder focus
My next pick is housebuilder Crest Nicholson (LSE: CRST). The whole sector is lowly valued right now, and providing some handsome dividend returns. But I think the expected EPS drop for the firm is making people fear more risk than there actually is, and share price weakness over the past two years is throwing up a nice bargain.
We’re looking at a forward P/E of only 7.7 with a forecast dividend yield of 8.9%. And though the dividend is expected to remain flat for another couple of years, it still looks adequately covered by earnings to me and I don’t see it under threat.
As Royston Wild points out, Crest Nicholson shares are on a lower P/E than Lloyds Banking Group, with a significantly bigger dividend yield — and Lloyds is still one of my top picks for undervalued income shares.
The company’s interim trading update on 15 May reported “sales value achieved to date and forward sold for FY19 including land and commercial of £792m, up 4.2%,” adding that net debt and and land creditors are down by £40.9m.
The firm also reiterated its strategy of “focusing on shareholder returns by pausing growth during this period of heightened uncertainty” and by prioritising cashflow and dividends. I see that as supporting my judgment that Crest Nicholson is an undervalued income stock, and way less risky than Bitcoin.