The hunt for reliable investment income has become even more difficult this year. Many companies have cut or suspended their dividends. However, there are still some high-yield dividend stocks I think you can trust.
Today I want to look at two income picks that were on Hargreaves Lansdown‘s list of most bought stocks last week. I reckon DIY investors who’ve been buying these dividend stocks could do well.
A top utility stock
My first pick is utility group National Grid (LSE: NG). This FTSE 100 firm is best known in the UK for operating the UK’s gas and electricity transmission networks.
These days, the UK business only accounts for around half the group’s profits. The rest comes from its US division, which runs gas and electricity supply businesses in the Northeastern US.
During the years I’ve been following National Grid I’ve come to believe that this split in the business is an advantage for shareholders. I think the diversity it provides is a good defence against the main risk faced by investors – regulatory changes that could limit profits and dividends.
This is relevant at the moment. National Grid is currently negotiating the rules for the next UK regulatory price control period, which starts in April 2021. Nothing’s final, but the signs so far are that UK regulator OFGEM is planning to take a tougher stance.
As things stand, National Grid shares offer a high dividend yield of 5.8% – well above the FTSE 100 average of around 3.7%. Despite the risk that regulatory change could put pressure on this payout, I think these shares remain a solid buy for income investors.
High-yield dividend stock: A safe 8% income?
My second pick is motor insurer Direct Line Insurance Group (LSE: DLG). I own Direct Line shares and I’m happy to report that the latest dividend from the group dropped into my Stocks and Shares ISA last week. Although it’s not my largest holding, this payout is certainly the largest dividend I’ve received so far this year.
Admittedly, Direct Line did suspend its dividend earlier this year. But its rapid return is a useful reminder that the firm’s business hasn’t been heavily affected by Covid-19. Indeed, the latest payout includes a catch-up payment to make up for the missed 2019 final dividend.
Direct Line’s generous cash returns are a useful reminder of this stock’s high-yield credentials. As one of the largest motor insurers in the UK, the group benefits from economies of scale and a strong ability to price insurance accurately.
These strengths are reflected in the group’s return on tangible equity, which at 20% is well above the FTSE 100 average.
Since Direct Line floated in 2012, shareholders have enjoyed consistently strong returns. I think this should continue, and with the stock trading on just 12 times forecast earnings, I think this high-yield dividend stock looks cheap.
Broker forecasts suggest Direct Line will pay a total dividend of 24p in 2021. This would give a dividend yield of almost 8%. I believe this payout should be sustainable and rate the shares as an income buy.
