The stock market has certainly been throwing up some recent bargains, in my view. There are clearly economic uncertainties around. That adds risks to the business outlook. But I think it has given me opportunities as an investor.
Falling share prices have pushed up the dividend yield on some income shares. Here are two I bought last month, which currently offer an average yield of 9%.
Direct Line
The first in insurance and financial services group Direct Line (LSE: DLG). I like the general insurance business area because, in broad terms, I think it is predictable and offers the opportunity for decent profits.
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Customers will keep needing to insure things like cars and houses. A long-established insurer like Direct Line should understand how to select risks to underwrite and set premiums at the right level to make money overall.
There have been some challenges lately though. For example, new rules introduced this year on renewal pricing threaten to hurt profits across the sector. Reporting half year results this week, the company’s adjusted gross written premium was down 2.6% compared to the same stage last year. Policies in force fell 9.2% and pre-tax profits were down by almost a third.
That is an alarming performance and helps explain why the Direct Line share price has crashed 33% over the past 12 months. That price fall means these income shares now yield 11.1%.
How secure is the dividend? Direct Line maintained its interim payout at the same level. Management said: “We continue to have confidence in the sustainability of our dividend“.
Direct Line benefits from an iconic brand, installed customer base of over 13m policyholders and pricing power as inflation changes consumer expectations about policy costs. So I also believe the dividend can be sustained, although that is never guaranteed. That is why I took advantage of the falling price to add Direct Line back into my portfolio.
ITV
The other income shares I bought last month were in media company ITV (LSE: ITV). With the media company yielding 6.9%, investing an equal amount in both Direct Line and ITV would hopefully give me an annual yield of 9%.
The story here is quite different to Direct Line as it is all about growth right now. The company’s external revenue grew 8% in the first half compared to the same period last year. Statutory earnings per share doubled. The company reintroduced its interim dividend, at 1.7p per share, and said it plans a full-year dividend of at least 5p.
None of that has done much for the ITV share price, which is 38% lower than a year ago. I do see risks here. For example, growth in revenues from the company’s studio business is welcome, but television advertising continues to look like an industry in long-term decline.
However, the company is performing well. It is reshaping itself to deliver growth and offers a dividend yield of nearly 7%.
I am happy to hold these income shares in my portfolio.
