In the current era of ultra-low interest rates, investors are more and more looking to their stock portfolios as a way to generate income. If the average rate on a savings account from a high-street bank is less than 1%, stocks with dividend yields above this start to look very attractive indeed! This is because such stocks are likely to be a good store of value, because they are unlikely to tank anytime soon, and they will also pay you some income in the form of dividends along the way, too.
In this article, we outline this approach to investing and pick 3 top UK dividend-yielding stocks with yields from the FTSE 250.
What Sort Of Yield Should I Aim For?
However, you should bear in mind that a yield can in fact be too high! This might sound paradoxical, but you have to think about how dividend yield is calculated. Dividend yield is the dividend payment per share divided by the share price. As such, if the price of the share falls, but the dividend stays the same, the yield will rise.
This is effectively stating that you had to pay out less to buy the share to access the same dividend as before. Likewise in the other direction, a very high share price will push the yield right down. So every investor on the hunt for dividend income needs to be aware that a very high dividend yield may mean the share price is very low and falling, and this could obviously signal major problems for the company.
With this broad guideline in place, and remembering the very low rate available on cash savings accounts, any yield above 2% is acceptable. Whilst yields over 10% might too a bit suspicious and could suggest the company is struggling to maintain its share price, yields in the 5-6% area are probably ideal. This represents a good balance of risk and reward, and such yields should be sustainable over the long term.
3 UK Dividend Stocks With Yields Over 6%
As a well-known name in the global investment platform world, Plus500 is currently riding high of the back off a fantastic start to 2020. Fintech companies are making strides left, right and centre these days, and look likely to take increasing market share from their more traditional competitors over the coming years.
Plus500 have been swift to capitalize on what they see as a new generation of traders with a technology-focused attitude to trading and investment. Some analysts feel that the mainstream established banks have been somewhat sidelined by this trend.
Plus500 are embarking on a large-scale share-buyback scheme, as well as returning profits to shareholders in the form of dividends. The current yield sits are around 5.73%, and this is very impressive given the upward moment on the share price following the recent good news about earnings increases in early 2020. Group revenue was an impressive $346.2m for the six months ending 30 June 2021.
In this period, Plus500 booked 136,980 new customers and this meant there was an increase in the base of active customers to 333,940. Plus500, therefore, looks like a great dividend stock right now, with growth potential for the future to add in as well.
Less technologically sophisticated than our first pick, Centamin is an old-fashioned gold mining company that focuses on the Arabian Peninsula. However, don’t fall prey to the current mania for everything tech-focused if it means you ignore other opportunities!
Centamin has recently seen a drop in profits, but have managed to maintain their dividend nonetheless. This can be interpreted in several ways, but for the time being it seems like management are confident the fall in profits is temporary and so are sticking to their dividend payment plan. The shares yield around 5.17% right now, which is right in the area of sustainable payments we identified above.
Basically, Centamin’s fortunes have taken a knock as gold has sunk a little from the record highs it achieved last year. However, nobody thinks gold is anywhere near to losing its profound economic relevance. Whenever the global economy hits a barrier, gold prices soar as investors look for safe havens.
As such, long term investors in miners like Centamin which pay decent dividends can sit back and relax – if anything, the next bout of financial turbulence should be good for gold miners! Centamin is slightly exposed, however, from the point of view that they only operate one mine.
This is unusual for a gold miner of this size, and they do have plans to go ahead opening a second mine in Côte d’Ivoire to reduce their vulnerability to potential problems occurring at their main mine. All things considered, Centamin looks like a great share for generating income at the moment.
3. Direct Line Insurance Group
For our final pick, a stock that actually yields over the 5-6% we said at the start to aim for. Direct Line shares offer a very attractive 7.24% dividend yield at the moment. However, as said before, yields move all the time in response to changes in the share price.
There are no hard-and-fast rules for assessing yields, and 7% is still at a low enough level that we would expect the stock to be able to maintain these kinds of payments in the future. In other words, it’s not an artificially inflated yield due to the fact that the share price has crashed.
Direct Line’s main business is insurance, and within that sector, their biggest earner is car insurance. As such, Direct Line has been an unexpected winner of the decline of commuting due to the rise of working from home. Basically, far less accidents are occurring as people are not rushing to and from the office by car so much anymore.
Although road millage has returned to normal pre-pandemic levels, the type of journeys people are making have changed. No more angry, time-pressed commuter driving leading to lots of minor accidents!
According to CEO Penny James, this is making a huge difference to the number of claims Direct Line are having to pay out on. As such, profits are up, and this has allowed Direct Line to reinstate their dividend at a good level. Because this is a structural change in how many people work that looks to be here for the long run, we think Direct Line looks like a great share to generate income.
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