Last week’s market shake-up was a timely reminder that nothing goes up in a straight line forever. But it doesn’t mean you need to panic-sell stocks in case things get worse.
If you own shares in good businesses and don’t need the money for a few years, there’s usually no reason to worry. Holding your nerve can be tough, though.
In my experience, one thing that makes it easier to sit tight in volatile markets is a reliable dividend. Receiving regular cash payments in your bank account is a useful reminder that the business in which you’re invested is still operating as usual, regardless of what’s happening in the stock market.
Should you invest £1,000 in Shell right now?
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Today, I’m going to look at two dividend stocks with yields of about 6% that I’d be happy to buy today.
Walking ahead of the market
Budget footwear retailer Shoe Zone (LSE: SHOE) gained around 10% this morning after announcing that profits for the year ending 30 September would be ahead of expectations. Strong sales, and the closure of loss-making stores, means that management expects pre-tax profit to be “in excess of £11m”, compared to £9.5m last year.
The group’s year-end net cash balance was £15.7m, £4m of which will be used to fund a special dividend for shareholders next year. I estimate this to be worth 8p per share, equivalent to a 4% dividend yield, on top of the stock’s regular yield of 5.6%.
Skilled operators
It’s worth point out that although this firm’s brand is associated with the cheap end of the market, its operations and financial performance suggest expert management to me.
By operating a store estate with low fit-out costs and short leases, the company has avoided being lumbered with costly loss-making stores.
By sourcing most of its own stock directly from factories overseas, Shoe Zone generates an impressive return on capital employed of around 25%.
By maintaining a debt-free balance sheet, strong cash generation is fed back directly to shareholders. Perhaps this is no surprise — 50% of the shares remain in the hands of directors Anthony and Charles Smith.
After today’s gains, I estimate that the stock trades on about 10.5, with an ordinary dividend yield of around 5.7%. I’d buy.
A 6% yield from the FTSE 100
If your focus is on big-cap stocks, then you might be interested in FTSE 100 motor insurer Admiral Group (LSE: ADM). This company has made a name for itself with investors thanks to long-term growth and generous special dividends in most years.
Like Shoe Zone, I believe Admiral’s execution of its business model is superior to some of its rivals.
The group partners with other insurance firms to share the risk on its customers’ policies. Doing this reduces the amount of capital Admiral needs to set aside to meet potential claims.
In turn, this means that the firm generates a lot of spare cash and a very high return on equity — a key measure of profitability for insurers.
Last year for example, the group’s full-year dividend represented 97% of earnings per share. Admiral’s return on equity for 2017 was 55%, which is roughly double the return earned by rivals Esure and Hastings.
Admiral’s share price has pulled back from recent highs of more than 2,100p. At about 1,950p, the stock trades on 16 times forecast earnings with a yield of 6%. I’d be a buyer at this level.
