Keeping at least some cash locked away for life’s little emergencies is a brilliant idea, in my opinion. With savings rates now starting to fall however, I’d be willing to invest anything over this ringfenced amount in an attempt to generate a tidy second income.
Here’s one quality dividend stock from the FTSE 250 that would be the destination for at least some of this excess money.
Ready to rocket?
At first glance, trading platform provider IG Index (LSE: IGG) might seem like a strange choice. After all, the stock has been in lacklustre form in 2023, falling 4% in value, year to date. This compares poorly to even the FTSE 250 index (up roughly 0.5%, as I type).
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But this doesn’t tell the whole story. Go back to late October and the shares were changing hands for just 600p a pop. Fast-forward to mid-December and they’re just over 750p, a 25% jump in less than two months.
Sadly, I never bought at its 52-week low. Nevertheless, I am optimistic this run might continue given that confidence appears to be returning to the market.
Bear in mind that IG generates a lot of business when traders get excited or fearful. And the Santa Rally we’ve seen so far suggests the former is back in fashion.
Solid second income
Of course, a sizeable capital gain on top of dividends would be nice. But let’s just focus on the latter for a bit.
As I type, analysts have the company returning 46.1p per share in FY24. Using the current price, that becomes a dividend yield of 6.1%. By comparison, the FTSE 250 index as a whole yields 3.6%. So IG potentially offers me a much higher second income stream.
That said, it’s not the highest yield I could get in the index. So, why would I consider this more than other, better-paying stocks?
There are two main reasons. First, IG has an excellent track record when it comes to actually returning cash to its shareholders. Indeed, it continued to distribute money throughout the pandemic, helped no doubt by the sudden (if passing) interest in trading many ordinary folks developed at the time.
Second, analysts anticipate that profit will cover the payout twice this year. As a rough rule of thumb, any buffer this large implies a cut is unlikely.
Risk of further regulation
Of course, never say never. Just like any other company paying out cash, the dividends at IG can never be guaranteed. One potential snag here is that it operates in an industry that’s long received a lot of attention from regulators. Any changes to the rules governing client behaviour could hurt IG’s bottom line.
It’s worth also mentioning that, while dividends began growing again in 2022, there was a period of a few years where they stood still. Generally speaking, I prefer to see a hike in most years.
Taking this into account, spreading my money around the market to at least some degree remains prudent.
Still cheap
These concerns aside, I still reckon there’s a possibility that IG could have a very encouraging 2024. Should this be the case, a price-to-earnings (P/E) ratio of eight could prove a bargain in time.
