UK indexes have fallen over the past two months, particularly after Liz Truss spooked markets with her catastrophic fiscal policy. Both the FTSE 100 and FTSE 250 are down considerably from summer highs. And when share prices fall, dividend yields go up — unless the company reduces dividend payments.

There’s obviously concern that we’re entering a recessionary environment and there will be further negative pressure on stocks. But, for me, these two stocks look well positioned to outperform the market and provide me with passive income.

Vistry Group

I think housebuilder stocks have fallen far enough. Vistry (LSE:VTY) grew impressively in 2021, with revenue coming in at £2.3bn, more than double any year before the pandemic.

And this growth has continued in 2022. Adjusted revenues in the six months to 30 June rose nearly 6% to £1.33bn, while total completions improved 5% to 5,409. Adjusted operating profits were ahead 13% at £198.2m.

However, with the economic climate worsening, and interest rates being hiked, the share price has tanked. In fact, Vistry is down 50% over one year. That’s huge, but in line with other housebuilders.

The issue is that analysts contend house prices will remain flat while cost inflation will run at 5%. That’s clearly an issue and it’s likely to impact housebuilders right through 2023.

But in the long run, I’m confident demand will return. And after a bumper two years, housebuilders should have the resources to see these troubled times through. Vistry has a debt to total capital ratio of 12.5% — a lower figure than the previous year’s 14.6% — and a net profit margin of 9%.

The stock, which is also the target for a proposed merger with Countryside Partnerships, also offers an attractive 10% yield. With 2022 still expected to be a record year, I anticipate the yield to remain constant for the time being. I already own Vistry shares, but I’m buying more.

Direct Line

Direct Line (LSE:DLG) posted a 31.8% decline in first-half pre-tax profit in H1 as it took a hit from claims inflation. Pre-tax profit fell to £178.1m from £261.3m in the first half a year earlier, although this was ahead of consensus expectations of £155m.

As a result of the above, the insurer is now down 31% over the year. However, I see this dip as an opportunity to add this stock to my portfolio. Regardless of a possible recession, people will still need or want to insure their homes and vehicles.

And this is something the business has highlighted. The group contends that its fundamentals remain strong and that through steps taken within its garage network, as well as pushing up prices, Direct Line has returned to writing at target margins “based on latest claims assumptions“.

I’m buying Direct Line because of these defensive qualities, but also its sizeable 11% yield. Even if payments are cut, proportional to the decline in H1 profits, it will still remain above the index average.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Urban Logistics REIT 

What it does: Urban Logistics REIT owns and operates more than 100 warehouses single-occupant designed for ‘last mile’ delivery.

By Royston Wild. Recent panic selling of UK assets has pushed prices of many top property stocks sharply lower. As a result, I believe Urban Logistics REIT (LSE: SHED) is an attractive buy for investors this November. 

At current prices, the FTSE 250 firm’s dividend yields for the next two financial years sit at an enormous 6.1% and 6.5% respectively. 

Property shares often provide investors with solid protection against high inflation. This is because they are usually able to raise rents in order to eliminate (or at least offset) increasing cost pressures.  

With UK inflation at 40-year highs and tipped to go higher, Urban Logistics could therefore be an effective wealth preserver. 

I wouldn’t just buy this REIT for the here and now, however. I’m expecting earnings (and consequently dividends) to grow strongly over the next decade as e-commerce steadily expands. 

Demand for the warehouses and distribution properties it owns appear on course to improve rapidly. And rents will likely stride higher given the weak construction outlook for this particular sector.

Royston Wild does not own shares in Urban Logistics REIT. 

LondonMetric Property

What it does: LondonMetric property is an urban logistics real estate manager with 17 million square feet in its asset portfolio.

By Zaven Boyrazian. LondonMetric Property (LSE:LMP) has been on a roll lately. Despite what the 33% drop in share price would suggest, the urban logistics property manager is seemingly thriving. In fact, as of October this year, occupancy stands at an impressive 99%, with an average lease term of 12 years among its tenants.

Even with e-commerce slowing on the back of reduced consumer spending, demand for urban logistics centres continues to grow – a trend management seems to be capitalising on successfully. As such, the stock offers an impressive 5.5% dividend yield.

With interest rates rising, real estate investment trusts like Londonmetric Property have been hit hard due to their high debt balances. But a closer look at the company’s loans reveals that 80% of its debts are either hedged or on a fixed rate.

In other words, the threat of rising interest rates to this business may not be as disastrous as many think. And that’s why I believe a buying opportunity in this stock has emerged for me.

Zaven Boyrazian does not own shares in LondonMetric Property.

Diversified Energy Company

What it does: Diversified Energy Company owns and operates around 67,000 mature natural gas and oil wells in the US.

By Charlie Carman. Diversified Energy Company (LSE: DEC) shares have climbed nearly 17% this year. The FTSE 250 stock offers a handsome 11% dividend yield.

A key reason I’m bullish is President Biden’s drive for American energy independence. As a domestic producer, the firm should benefit from White House policies designed to combat spiralling commodity prices fuelled by the Russo-Ukrainian war and OPEC+ production cuts.

In addition, I’m encouraged by the company’s recent share buyback scheme to capitalise on sterling’s weakness against the dollar.

Admittedly, DEC posted a $935m net loss in H1 2022, which concerns me. I’m also sceptical about the accounting accuracy of decommissioning liabilities, which assumes its old wells will survive until 2095.

Nonetheless, the business model looks healthy overall. In particular, I like the robust 22% free cash flow yield that underpins DEC’s market-leading dividend. With supportive government policies acting as a tailwind for the foreseeable future, I’d buy this stock in November.

Charlie Carman does not have a position in Diversified Energy Company. 

DS Smith

What it does: DS Smith provides sustainable packaging solutions, paper products and recycling services worldwide.

By Kevin Godbold: Despite all the gloomy economic news around, DS Smith (LSE: SMDS) issued an upbeat trading statement on 10 October.

The company reported “good and consistent” trading. And the directors said overall performance for the year will likely be ahead of their previous expectations. DS Smith is one of many businesses that have been confounding the market’s expectations recently.

I like the company’s robust cash flow record — ideal for supporting its progressive dividend policy. And after prudently skipping a few dividends in the depth of the pandemic, DS Smith has jumped straight back in to the groove of pushing the shareholder payment a little higher each year.

There’s competition in the sector. But DS Smith is well established. And I think the industry has a tailwind. Meanwhile, with the share price near 290p, the forward-looking yield is running at around 6%. I think that’s attractive.

Kevin Godbold does not own shares in DS Smith.

Imperial Brands

What it does: Imperial Brands is a multinational tobacco company and is the world’s fourth-largest international cigarette company measured by market share.

By John Choong. The Imperial Brands (LSE: IMB) share price has remained rather robust this year, outperforming its parent index by quite some margin. Not to mention, its excellent dividend yield of 7% paired with a solid history of payment makes it a lucrative income stock to buy for my portfolio.

Luxury goods tend to benefit during times of inflation due to their inelastic demand. Most of Imperial’s products are catered to a niche market, and has been evident in the company’s last couple of results. Although growth hasn’t been stellar, it’s certainly been robust, while dividend payments continue to increase. The company also recently announced a share buyback programme, which should bring more value to shareholders.

With its next ex-dividend date estimated to be later this month, I’m planning on starting a position and capitalising on the ability to generate passive income in the current inflationary environment.

John Choong has no position in Imperial Brands.

Direct Line

What it does: Direct Line provides motor and general insurance in the UK.

By Christopher Ruane. Insurance tends not to be a very exciting business. In fact, it is often rather boring. As an investor, though, that is precisely why I like it. Demand is relatively stable, proven operators have enough experience to price risks at the right level, and the business model does not look like it will stop working any time soon.

Direct Line (LSE: DLG) has those characteristics. It avoids the more exotic corners of the insurance market and is highly profitable.

Right now, Direct Line shares yield 11.4%. That is certainly attractive to me, which is why I own some. It is also high compared to most FTSE 250 peers, though. Does that suggest a cut is coming? Rising vehicle costs pose a threat to profit margins and that could continue in coming years. But the company’s business model, iconic brand and large dividend make it appealing to me.

Christopher Ruane owns shares in Direct Line.

Tritax Big Box

What it does: Tritax Big Box REIT owns, manages and develops logistics real estate in the UK.

By Paul Summers: My pick for November is FTSE 250-listed real estate investment trust (REIT) Tritax Big Box (LSE: BBOX). Having tumbled over 40% in value in 2022, its shares yield a very respectable 4.9%. 

Now, I could shoot for more income elsewhere. However, I’d rather back Tritax for two reasons. First, it’s a relatively low-risk way of tapping into the ongoing growth of e-commerce (the company provides warehouses for some of the biggest retailers around).

Second, the fact that REITs are able to raise rents to cover rising costs without too much fuss makes Tritax a great option for battling inflation. 

Having coveted the stock for so long but been put off by the price tag, now could be an excellent time for me to begin building a position by buying its shares in November. 

Paul Summers has no position in Tritax Big Box.

Aviva 8 ⅜% PF 8 ⅜ CUM IRRD PRF #1

What it does: Aviva is a multiline insurance company. Its preferred stock pays a fixed dividend of 8.375p per year.

By Stephen Wright. My best British income stock for November is Aviva 8 ⅜% PF 8 ⅜ CUM IRRD PRF #1 (LSE:AV.B) Catchy name, but what is it?

In short, it’s Aviva’s preferred stock. Unlike the common equity, the stock pays a fixed dividend of 8.375p per year. 

That dividend has to be paid by management before any dividends get paid to common shareholders. And if it doesn’t get paid in a particular year, it rolls over and all of the outstanding dividends have to be paid to preferred shareholders before any are paid to holders of common stock.

The shares can’t be bought back by the company outside of an Extraordinary General Meeting. So I expect to keep receiving the dividends from these for some time.

In a turbulent market, I’m looking for something relatively predictable. That’s why I’ve settled on this as my choice.

Stephen Wright owns shares in Aviva 8 ⅜ PF 8 ⅜ CUM IRRD PRF #1.

M&G

What it does: M&G is a savings and investment management company, managing shares, real estate and other assets.

By Alan Oscroft. Like others in the investment management business, M&G (LSE: MNG) has fallen out of favour among investors in the current economic crisis.

The share price slumped when inflation started escalating a few months ago. After a modest October recovery, though, M&G is only around 10% down over the past 12 months.

That still leaves the forecast dividend on a hefty 10.5% yield. It’s risky relying on a dividend forecast. But M&G is currently engaged in a share buyback programme, which suggests it has the cash available.

The incoming chief executive and the chairman both bought M&G shares in October, which is also encouraging.

In the first half, its Wholesale Asset Management business achieved net client inflows for the first time since 2018. The second half could prove tougher, and that’s where the short-term risk lies.

But I’ll be considering M&G as the next stock for me to buy as a long-term dividend investment.

Alan Oscroft does not own M&G shares.

BlackRock World Mining Trust

What it does: BlackRock World Mining Trust in an investment trust that runs a diversified portfolio of global mining stocks.

By Ben McPoland. The decarbonisation of the global economy is going to take many decades. And this transition is going to need a lot of raw materials. Whether it’s iron ore to make wind turbines or lithium for the batteries of electric vehicles, decarbonisation is a massive tailwind for mining companies. The BlackRock World Mining Trust (LSE: BRWM) is perfectly placed to capture this demand, I believe, as it has positions in most of the companies mining and selling these vital raw materials.

Some of the trust’s largest holdings include BHP Group, Glencore, and Rio Tinto. It has a dividend yield of 7%, and the payouts have increased substantially over recent years

It should be noted that mining shares can experience much more volatility when compared to other investments. However, I’d be inclined to see dips in the trust’s stock price as opportunities to buy more for my holdings. I intend to start a position myself in November.

Ben McPoland has no position in BlackRock World Mining Trust.

Warren Buffett (92 in August) has been investing in stocks since age 11. After 80+ years of outstanding returns, he has a personal fortune of $103.7bn. Yet he has donated over $49bn to good causes and intends to give 99% of his fortune to charity. Wow.

Warren Buffett loves owning insurers

Warren Buffett manages a diverse group of businesses under the Berkshire Hathaway umbrella. These include insurance companies, a major railway, a battery maker, clothing and jewellery firms, and fast-moving consumer goods businesses. Today, Berkshire is worth a whopping $655bn. But it’s well known that Warren Buffett loves the economics of insurance companies.

Indeed, one of four pillars of Berkshire Hathaway’s success is its various insurance subsidiaries. These companies collect insurance premiums upfront, but pay claims later. This generates a ‘float’ of cash and traded securities that gets invested to boost company returns. In 2021, Berkshire Hathaway’s float made the group $9bn. Nice.

“Price is what you pay; value is what you get”

Warren Buffett made the above comment in his 2008 letter to Berkshire shareholders. And I know that, as a value investor (like me), he loves to buy shares in quality businesses when they are discounted or on sale.

I’ve spotted one well-known, well-respected UK insurer that Buffett could buy on the cheap, presently valued at under £2.7bn. My ‘Buffett business’ is leading UK insurance provider Direct Line Insurance Group (LSE: DLG). For the record, my wife bought Direct Line shares in late July at an all-in price (including stamp duty and buying commission) of a whisker above £2.

Five reasons Buffett should buy Direct Line

Though I’m guilty of talking up my own book here, if I had a spare £3bn+ lying around, I’d happily buy Direct Line outright. In reality, any takeover bid would have to be pitched at a substantial premium to the current market value, but you see my point, right?

Here are five reasons why I’d urge Warren Buffett to snap up this FTSE 250 firm:

1. Below £4bn is pocket change for Berkshire Hathaway, which has a cash pile of around $70bn (and growing fast).
2. Direct Line has great consumer brands (including its famous red telephone on wheels) and over 13.2m policies in force across a wide range of competitively priced insurance products.
3. It has a strong balance sheet, with a ‘solvency capital ratio’ 52% above the regulatory minimum.
4. The company’s dividend yield of nearly 11.2% a year is one of the highest in the FTSE 350 index.
5. Though this cash yield is covered only 0.9 times by trailing earnings, the group has no current plans to cut this payment.

Also, on the price/value front, Direct Line shares hit a 52-week high of 313.7p on 19 January, more than 50% above their current price of 203.4p. For me, Warren Buffett should run his rule over DLG before it gets more expensive. But storm clouds (inflation, energy bills, higher interest rates) are gathering over UK consumers and could harm corporate earnings, so I could well be wrong. Still, I have long-term hopes for this stock, so I may buy more shares!

Here is why the investment case and share price for each attracted me.

Direct Line

For most people, the financial services company Direct Line (LSE: DLG) needs little introduction. Its iconic red telephone logo is ingrained in the mind of millions.

That is good for the business: it currently has over 9m insurance policies in force. I like the economics of the general insurance business in which Direct Line competes. Demand for lines such as home and motor insurance tends to be resilient; motor insurance is mandated by law for most vehicles. If an underwriter has sufficient volume, it can usually predict claims volume as a percentage of policies and price its services accordingly.

That helps explain why Direct Line is profitable. It has a juicy 11.2% yield to boot. That has risen thanks to a 30% fall in its share price over the past 12 months.

Car price inflation hurting profit margins concerns investors. A fall in the number of policies in force also threatens sales and profits. But as a long-term investor, I hope Direct Line can overcome such difficulties and let its underlying business model help it perform well.

Dunelm

I owned homeware retailer Dunelm (LSE: DNLM) at the start of October.

The shares have fallen a third in the past year. Perhaps that is explained by investor concerns that consumers with less spare money will cut back on purchases for the home, hurting sales and profits at Dunelm. Revenue in the most recent quarter declined 8% compared to the same period a year ago. Gross margins also fell, which could be bad for profitability.

But Dunelm is a quality operator with a proven business model. It has maintained its guidance for the full financial year, of profit before tax in line with analysts’ expectations of £130m-£193m. That would be a decline from last year’s record results but still solidly profitable. A price-to-earnings (P/E) ratio of just 10 looks attractive to me. I bought more of these FTSE 250 shares this month.

ITV

What is the future for traditional television companies?

Maybe it is continuing to run old school operations, which can still throw off large advertising revenues. Perhaps it is utilising decades of expertise to expand business by producing content, both for themselves and other media properties. It could also be moving into the digital arena.

The UK broadcaster ITV (LSE: ITV) is doing all three. The FTSE 250 company remains solidly profitable, making more than a million pounds a day on average last year in pre-tax profit. The City seems not to like the company’s strategy, though, with ITV shares falling 36% in the past year.

I do think an advertising downturn could hurt revenues and profits at ITV. But the P/E ratio of under five, combined with a prospective dividend yield of almost 8% based on management guidance, make the shares very attractive to me. I increased my holding this month.

Unilever

The consumer goods company Unilever (LSE: ULVR) is the business behind such well-known names as Marmite and Dove. Its focus on products that are used regularly by billions of consumers means it benefits from resilient demand. Owning premium brands gives it pricing power, allowing the firm to make juicy profits.

That has come in handy lately, as soaring inflation has pushed up the cost of making and selling its products. Unilever’s pricing power means it has been able to pass higher costs onto consumers without losing lots of sales volume.

I see inflation as an ongoing risk to profitability, but I like the firm’s business model and its long-term prospects.

Direct Line

Whatever is happening to the economy, people will still need or want to insure their homes and vehicles. That means that demand for general insurance services should be robust.

I reckon one firm that can benefit from that is Direct Line (LSE: DLG). The company’s shares have fallen sharply, though. They now stand 30% below where they were a year ago.

Why is that? Partly I think it reflects investor concerns that rising vehicle costs could make claims settlement more expensive, hurting profits. The insurer’s first-half results also showed a decline of 9% in the number of policies in force compared to the same period last year. That business slump is obviously not what a lot of investors want to hear.

But I think the fall in the Direct Line share price offers a buying opportunity for my portfolio. Indeed I bought back into the insurer over the past couple of months. I see long-term demand in its market and reckon Direct Line’s strong brand can help it capitalise on that. With an 11.5% dividend yield, I am hopeful that Direct Line can provide me with some welcome passive income streams even during a recession.

British American Tobacco

The addictive nature of smoking means that many people keep doing it even when money gets tight. That makes tobacco a classic example of what is known as a defensive stock.

This might explain why investors have been buying into British American Tobacco (LSE: BATS). Over the past year, its performance has been the mirror image of Direct Line, with the share price increasing by 30%.

Even after that increase, the dividend yield is a juicy 6.4%. The company is highly cash generative, which could be good for future dividends. That is why I hold these UK shares.

The long-term decline in the number of cigarette smokers threatens both revenues and profits. But the company’s pricing power can help mitigate that and it is also building a non-cigarette business at speed.

Insurance provider

As a quick reminder, Direct Line is an insurance company specialising in personal insurance products such as car, home, travel, life, and pet. It also provides insurance to SMEs. Operating under many brands, it also has extensive partnerships with many other financial organisations too.

So what’s happening with the Direct Line share price currently? Well, as I write, the shares are trading for 181p. At this time last year, the stock was trading for 262p. This is a decline of 30%. Since the first week of September, it has lost nearly 16% in value. This is due to the recent change in government, volatility here in the UK economy, and the recent, ill-fated mini-budget announced last week.

Short-term challenges to note

Despite my bullish attitude towards Direct Line, it does face some credible headwinds in the shorter term. Soaring inflation, the rising cost of materials, and the government’s response, which was to raise interest rates, has hurt it, and many other financial services businesses. For example, Direct Line has seen a material increase in the number of claims it is processing. This has led to it having to increase pricing, which has affected investor sentiment.

A positive aspect of Direct Line is its position as a dividend stock. In times of economic volatility, dividends can be cut to conserve cash and navigate stormy waters. Even if this happens, I believe it would be a shorter-term issue for me.

Why the Direct Line share price is calling me

Firstly, I believe Direct Line’s position in the insurance market is pivotal in terms of its longer-term recovery and success. It has a diversified business model and good brand power, coupled with several strategic key partnerships. All these facets should help boost growth, performance, returns, and investor sentiment in the longer term.

Earlier I mentioned Direct Line’s passive income opportunity. At current levels, the dividend yield stands at close to 12%. This is three times the FTSE 100 average of 3%-4%. Even if the dividend was cut due to recent issues, I would be confident it would surpass this average.

Last but not least, Direct Line has a strong balance sheet. This is crucial for me as a potential investor as it tells me the company has enough cash in the coffers to cope with the current headwinds. This could also keep the company paying out some form of dividend.

In conclusion, I believe Direct Line shares are in for a tough time in the shorter term. In fact, so are many other insurance and financial services organisations. However, I believe it has the tools, experience, brand, and cash to overcome these issues and be a great long-term buy for my portfolio.

I have decided to add Direct Line shares to my holdings imminently. They look more attractive to me since they fell and currently trade on a price-to-earnings ratio of just 10.

I already thought Direct Line shares were undervalued and looked like a long-term buy. So are they an even better buy now after the latest fall? I think so. But the risks have surely also increased.

New chancellor Kwasi Kwarteng’s so-called mini-budget has had a maxi impact. He might have thought home buyers would benefit from reduced stamp duty. But that’s likely to be more than wiped out by soaring mortgage costs as interest rates look certain to rise faster than previously expected.

The Kwarteng crash?

It’s all about the plunging value of the pound, which is a direct result of Kwarteng’s huge tax cuts. The government needs to rely on ballooning borrowing to pay for them, and that damages confidence in sterling.

Costs of imported goods are climbing, driving inflation even further, directly thwarting the Bank of England’s efforts to control it.

One result is a hammering for the financial sector. Insurance shares are tumbling across the board. In addition to Direct Line’s Wednesday fall, shares in Admiral Group, Aviva, Legal & General, Prudential… they’re all falling.

Tough first half

The motor insurance business was already looking tough for Direct Line in 2022. The company was seeing claims rising above levels that had been assumed in its pricing calculations. And it had little alternative but to start hiking its charges.

That’s a tough decision to make in such a competitive business. It was surely the right thing to do for the long-term health of the company. But it did lead to a share price fall at the time. And if costs in the business rise further, there must be a chance we could see further rises in insurance premiums.

Bearish? Not me

Do I sound like I’m taking a bearish view of the insurance business? I’m certainly not. In fact, I remain bullish about the long-term prospects for the sector. And I remain convinced that the best time to buy is when sentiment is at its lowest.

I thought Direct Line’s financial measures were pretty decent at the halfway stage, with an estimated solvency capital ratio of 152%. The company said it was “confident in the sustainability of its regular dividends” and maintained its interim payment.

Big dividend

With the Direct Line share price falling, forecasts put the full-year dividend yield at 11.5% now. I do think the current financial panic has the potential to dent the company’s confidence in its dividend a little. And I suspect it’s already dented public confidence.

But I see a decent safety margin there. And even if Direct Line should need to pare back its dividend a little to cope with short-term pressure, I still see the potential to beat the FTSE 100 average. And by quite some margin.

My verdict? Increased short-term risk, but solid long-term prospects. If I wasn’t already invested in the insurance business, Direct Line would be on my buy list.

Here are a couple of examples of shares trading at just such a discount, that I would consider adding to my ISA in September.

Dunelm

Shares in homewares retailer Dunelm (LSE: DNLM) have lost close to half their value in the past year, falling 45% in that period. But why?

Clearly there are worries among investors about risks, such as falling consumer spending leading to lower revenues for retailers. A lot of home decoration is seen as discretionary. So as household budgets tighten, it may be paused in favour of paying for everyday necessities such as food and energy.

I am not sure that will happen though. Dunelm has some very cheap products that might be just what shoppers want to cheer themselves up when times are tough.

I also think the sheer quality of this company makes it stand out to me as an investor. It grew sales last year by 16% and sales are now 40% higher than they were before the pandemic. The company has a track record of growing its market share, meaning it should be able to improve sales even when market demand overall is flat.

The company is also free of debt, giving it an enviable balance sheet going into a recession. It also offers a 5% yield. Despite these attractive financial qualities, Dunelm shares now trade on a price-to-earnings ratio of less than 10.

These look like bargain UK shares to buy now and hold in my portfolio – which is what I am doing. I have already bought some Dunelm shares and I am considering purchasing more in September.

Direct Line

Another company that has seen its share price tumble in the past year is insurer Direct Line (LSE: DLG). The shares are trading 32% lower than they were 12 months ago.

There are some reasons for that. Soaring second-hand car prices threaten to make the insurance business less profitable than it was before. New rules on renewal pricing that were introduced this year could also lead to profit margins falling at insurers.

But insurance is an enduring business that I expect to benefit from strong ongoing demand. Insurers are expert at matching their pricing to what the market can tolerate, so I expect Direct Line to remain profitable.

Even though profits declined 32% in the first half compared to the same period last year, Direct Line still earned £178m across six months — almost a cool million pounds each day. That helps fund a big dividend, with the yield currently sitting at a tempting 10.8%.

The company has strong customer awareness and over 13m policyholders. That could set the foundation for ongoing profits. I am optimistic about the long-term outlook for Direct Line, despite the share price fall. If I had spare cash to invest and was looking for UK shares to buy now, this is one of the companies I would consider.

Today I want to look at three of these companies, all with dividend yields over 5%.

10% yield from a household name?

My first pick is home and motor insurer Direct Line Insurance Group (LSE: DLG).

This well-known firm has a big share of the UK market, but conditions are difficult at the moment. Soaring used car prices and repair costs have put profits under pressure.

Direct Line’s share price fell recently, after the company has admitted that profits would be lower than expected this year. This slump has left the stock with a tempting 10% dividend yield.

How safe is this bumper payout? In my view, Direct Line can probably hold its dividend if the group’s profitability recovers next year. CEO Penny James says this should happen, as insurance price rises feed through.

The main risk I can see is that it will take longer than expected for profits to recover. If that happens, I think a dividend cut could be needed.

Personally, I’m happy to accept the risk of a cut. I think Direct Line is a good business with a solid future. On balance, I think the shares offer good long-term value at this level.

Profit from market volatility

Financial trading firm IG Group (LSE: IGG) is best known for its spread betting and CFD services, which are popular with UK retail investors.

I’ve owned this stock for several years and it’s served me well during uncertain times. Profits hit record levels during the pandemic, as volatile markets boosted trading activity.

IG is the market leader in this sector. The group boasts an operating profit margin of more than 40% and strong cash generation. However, the maturity of the UK market means that growth opportunities at home may be limited.

To address this, CEO June Felix has bought US options trading firm tastytrade to use as a launchpad into the US market. If she’s successful, then I think the potential growth is huge. The risk is that the US market is tough and competitive — success won’t be easy.

The good news is that I don’t think the market is pricing in much US growth yet. IG shares trade on just nine times forecast earnings, with a dividend yield of nearly 6%. I view the stock as a buy for income.

An underrated bank

My final pick is FTSE 250 merchant bank Close Brothers (LSE: CBG). This £1.7bn bank specialises in commercial lending, car finance, and stockbroking. It’s not exactly a household name, but Close has been in business since 1878 and is well-respected in the City.

Until 2020, Close Brothers hadn’t cut its dividend for more than 30 years. The payout is already back to 97% of its pre-pandemic level, with a further increase pencilled in for the year ahead.

Like all banks, Close Brothers faces the risk of rising bad debts if the UK goes into recession. But the company’s long track record and solid profitability suggest to me that the situation will be manageable.

With a 5.7% dividend yield and long-term growth prospects, Close is on my buy list.

FTSE 250 share #1: Direct Line

Direct Line Insurance Group (LSE: DLG) is a household name, becoming a leading motor insurer since starting out in 1985. Nowadays, it also sells business, life, pet, and travel insurance under various brands, relying on its famous red-telephone logo.

But this FTSE 250 share has slumped this year, following new rules that prevent insurers from overcharging existing customers. At its 52-week high on 28 October 2021, Direct Line stock hit 318p. As I write, it stands more than £1 lower at 215.8p. Here’s how this share has performed over time:

Though this stock has bounced back lately, it has lost over three-tenths of its value over one year and is close to halving over five years. But we invested in this FTSE 250 share after these steep falls, buying in at around £2 a share. And what drew us to invest in Direct Line was its fat dividends, which the group recently confirmed are safe (for now, at least).

At the present share price, this mid-cap stock trades on an earnings yield of 9.3% and offers a market-leading dividend yield of 10.5%. Thus, this cash yield is not fully covered by earnings, so it might be cut in future (perhaps in 2023/24). Nevertheless, I’m a great admirer of this £2.8bn company, so we intend to hang onto this quality business for the long term.

Dividend stock #2: ITV

Another FTSE 250 share we bought recently was ITV (LSE: ITV). ITV is the UK’s leading terrestrial commercial broadcaster, operating six TV channels. It is also a major producer of media content, which it sells worldwide. But this cheap share has also lost a big chunk of value in recent years.

At its 52-week high, the ITV share price briefly hit 127.19p on 12 November last year. As I write, it hovers around 69.6p, having almost halved (-45.3%) since then. Here’s how it’s performed over six time scales:

Frankly, owning ITV shares has been an unpleasant experience for a long while, with the stock down over two-fifths in the past 12 months. Also, it has crashed by almost three-fifths over the last half-decade. Yikes.

However, I see potential for a turnaround (or takeover) at ITV. In the meantime, its shares look cheap to me. They offer an earnings yield of 16.8% and a bumper dividend yield of 7.2% a year. What’s more, this cash yield is covered more than 2.3 times by earnings, which is a decent margin of safety.

Finally, I expect these two FTSE 250 stocks to be fairly volatile in 2022/23, due to soaring inflation, rising interest rates and slowing economic growth. But I buy shares for the long term, so I’m not panicking just yet!