Direct Line Insurance Group plc could yield 7.5% in 2017

The dividend appeal of Direct Line Insurance Group plc (LON: DLG) could be set to increase.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tuesday’s results from insurance company Direct Line (LSE: DLG) suggest that it remains a strong income stock. While its performance in 2016 was negatively impacted by a change to the discount rate used to assess personal injury claim payouts, its outlook appears to be relatively upbeat. Since its shares have fallen by over 6% in the last month, its yield in 2017 could top 7.5%. Therefore, it seems to be one of the most enticing income stocks in the FTSE 100.

A difficult year

Of course, the recent news that the government was making a large change to the discount rate used for personal injury claims (the Ogden discount rate) came as a surprise to the motor insurance industry. It caused investor sentiment in Direct Line’s shares to decline and also meant that its profitability for the 2016 financial year was lower than expected. Despite this, the company was able to increase its final dividend by 5.4%, to 9.7p per share. This meant total dividends for 2016 were 24.6p per share, which included a special dividend of 10p per share.

Dividend growth prospects

Looking ahead, Direct Line will only pay one special dividend per year in order to better align its spending requirements. While a change in the Ogden discount rate means that the company’s future dividend payments are now less certain than they once were, the reality is that any higher costs incurred in claims by insurers such as Direct Line and peers such as Hastings (LSE:HSTG) are likely to simply be passed on to consumers. This will be in the form of higher premiums, which means that the overall effect on the company’s bottom line and its ability to pay dividends may be zero.

Should you invest £1,000 in ITV right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if ITV made the list?

See the 6 stocks

In fact, in the 2017 financial year Direct Line is due to pay total dividends of 26p per share. Following its recent share price fall, this means that it now has a forward yield of over 7.5%. Since it trades on a price-to-earnings (P/E) ratio of 11.9 versus a historic average over the last five years of 12.8, it seems to offer a margin of safety.

Sector peer

Direct Line’s attraction as an income stock is perhaps best evidenced when compared to a sector peer. Motor insurance specialist Hastings currently yields 4.7%. This is around 100 basis points higher than the FTSE 100’s dividend yield, but still lower than its sector peer. As with its industry rival, Hastings is likely to pass on to consumers the higher costs resulting from the change to the Ogden discount rate. Therefore, its forecast growth rate in earnings of 27% this year and 9% next year has a reasonable chance of being met.

However, since Direct Line is forecast to record a rise in its earnings of 34% this year and 4% next year, there is little to choose between the two stocks when it comes to earnings growth. But with such a large difference in yield and a similar prospects in terms of passing higher costs on to consumers, Direct Line seems to be the superior income stock for 2017.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Direct Line Insurance. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »