Over the past five decades, the group has completed a string of deals in the sector snapping up some of the most significant players in the market.

Buffett likes to buy well-run, profitable insurance companies that have a track record of sensible underwriting. Firms like Lancashire Holdings (LSE: LRE).

Well-diversified

Lancashire is really three different businesses: Lancashire, Cathedral and Kinesis. As my Foolish colleague Kirsteen Mackay recently explained, Lancashire and Cathedral provide specialist insurance against catastrophic events such as hurricanes. They also offer unique insurance policies for the property, marine aviation and energy sectors.

On top of this, the Kinesis segment manages reinsurance for the business. It offers a management service for third parties who want to invest in the insurance industry but don’t know where to start.

Lancashire’s profitability track record is outstanding. The group’s 10-year average combined ratio (a measure of insurer profitability) is around 70%, compared to the industry average of nearly 100% (the lower the ratio, the better).

On top of this, management has adopted a policy of paying out as much capital as possible to shareholders. Shares in the insurance group currently support a regular dividend yield of less than 2%, but the company regularly distributes special dividends, which has jacked up the yield to more than 10% in the past.

Analysts are forecasting a total yield of 5.4% for 2019.

Sector leader

Another insurance business that stands out as a sector leader is Sabre Insurance (LSE: SBRE). Sabre stands out because the company has managed to carve out a niche for itself in the highly competitive car insurance sector.

The group’s three direct brands are Go Girl, Insure2Drive and Drive Smart, all tailored specifically to cater to individual needs. While they may be slightly more expensive than other policies, customers seem happy.

Revenue has grown at a compound annual rate of around 10% over the past five years, and City analysts are expecting the company to report a net profit of £50.2m for 2019.

Based on these figures, the stock is currently trading at a forward P/E of 15.3. This is slightly above what I would consider an appropriate valuation for a company that’s for not expected to report any earnings growth for the next two years. However, like Lancashire, Sabre likes to reward its investors with cash payouts.

This year, city analysts are forecasting a full-year dividend of 20.2p, which gives a dividend yield of 6.8% on the current share price. Sabre’s niche brands, as well as the company’s customer loyalty and cash generation, are the key reasons why I believe Buffett would be interested in adding this stock to his portfolio.

The post 2 FTSE 250 dividend stocks yielding 6% I think Warren Buffett would buy appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Berkshire Hathaway and Lancashire Holdings. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The FTSE 250 stocks I’m going to look at today are good examples of this, in my opinion. All three face some kind of risk. But each one also has a solid track record, strong finances and a forecast dividend yield of more than 7%. Is now the right time to buy?

Reputation risk

The share price of oil services group Petrofac (LSE: PFC) has fallen by more than 50% since the Serious Fraud Office opened a bribery investigation into the firm in 2017. So far, only one former employee has been prosecuted, but the investigation remains ongoing.

As far as I can see, the first risk facing investors is that the company will eventually be prosecuted and hit with a big fine by the SFO. The second risk is that damage to its reputation could make it harder to win new work.

A trading update today seems to hint at this problem. Chief executive Ayman Asfari says that although trading is in line with guidance, the firm is facing “challenges in Saudi Arabia and Iraq”. These are the two countries involved in the SFO investigation.

The rate of new orders seems to be falling, with new orders of $1.7bn so far this year, compared to $1.8bn during the same period last year.

However, Petrofac shares now trade on about six times forecast earnings, with a 7.1% yield. If was to bet on this situation, I’d guess that the firm will weather this storm and return to growth. If I’m right, the shares could be good value at around 400p.

Safe as houses?

Big housebuilders continue to report record profits and pay generous dividends. FTSE 250 firm Redrow (LSE: RDW) is no exception. Pre-tax profit rose by 21% to £380m last year and has continued to rise this year. In April, shareholders were rewarded with a 30p per share cash return on top of the regular dividend.

RDW shares look affordable to me, trading at 1.2 times net asset value and on around six times forecast earnings. The total dividend payout (including one-off payments) for the current year is expected to provide a yield of more than 9%. The forecast dividend yield for 2019/20 is 7.4%.

What’s the risk? Well, many believe the UK housing market may be slowing. And the planned end of Help to Buy in 2023 could put pressure on profits.

My view: I’d be happy to buy Redrow today and then buy more shares at a lower price during the next market downturn.

Are you insured?

Motor insurer Sabre Insurance (LSE: SBRE) specialises in providing cover for high-risk drivers. These pay much bigger premiums.

This company’s smaller size and specialist focus has helped make it highly profitable. In 2018, only 70% of its premium income was needed for operating costs and claims. The figure for most mainstream rivals was over 90%.

However, growth was non-existent in 2018 and profits are expected to be flat again this year. Rising repair costs are also a problem.

Despite all of these risks, I’d suggest that this company’s specialist niche and high profit margins could make it a good buy at current levels. Trading on 13 times 2019 forecast earnings and offering a 7.7% yield, the shares look temptingly priced to me.

The post 3 FTSE 250 dividend stocks with yields of 7%+ I’d buy today appeared first on The Twelfth Magpie.

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• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Undervalued 

These two companies are both specialists in their own respective industries and have adopted a policy of returning as much as possible to investors, which is great news for income seekers. 

On top of their attractive income credentials, both companies trade at discount valuations. Crest, for example, is currently dealing at a forward P/E of 7.8. Meanwhile, shares in Sabre are changing hands at a forward P/E of 13.8. This might look expensive at first glance, but considering the fact the company reported an operating profit margin of just under 32% last year, I think the company is undervalued. 

Indeed, Sabre’s insurance peer Admiral, which last year reported an operating profit margin around the same level, is currently changing hands at a forward P/E of approximately 16.

Specialist businesses

As mentioned above, both Crest and Sabre operate relatively unique businesses in their own industries. 

While most of the listed homebuilders are concentrating on supplying the affordable end of the housing market, where property prices range between £150,000 to £300,000, Crest’s focus is on the middle section of the market. The group sold just over 3,020 homes last year at an average selling price of £393,000. Of these, 637 homes qualify as affordable, which drags down the average slightly.

Sabre is also targeting a premium market. In the highly competitive UK motor insurance market, its business is “biased toward the specialist, higher premium segments,” which has translated into strong growth for the company over the past five years.

The fact that both Crest and Sabre target premium segments of their respective markets is, in my opinion, great news for income investors. Premium segments of any market tend to be less susceptible to recessions and economic downturn, implying these companies should continue to generate steady profits even in the most uncertain times. That’s great news for income-seeking investors.

At the same time, both companies are reporting above-average profit margins. As I noted earlier, Sabre’s profit margins are some of the highest in the UK insurance market. Crest’s five-year average operating profit margin is approximately 19.5%, according to my calculations, which is nearly double the current homebuilding industry average of 9.2%.

Best income stocks 

Both companies’ market-leading profit margins should mean that their market-beating dividend yields are here to stay for the foreseeable future. At the time of writing, shares in Crest support a dividend yield of 8.3% and shares in Sabre yield 6.9%. Additionally, both companies have a positive net cash balance, giving them headroom to sustain the payout, or even increase it if the going gets tough.

So overall, these two companies have market-beating dividend yields, attractive valuations, and sector-leading profit margins. Combined, all of these factors tell me they’re great high-yield stocks to include in your ISA. I don’t think they’ll let you down.

The post 2 ‘high-yield’ FTSE 250 stocks I’d buy for an ISA now appeared first on The Twelfth Magpie.

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• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In this article, I’ll give my verdict on National Grid. I’ll also reveal another income stock I like, which currently yields 7%.

The ultimate buy-and-hold?

The future is always uncertain. And it’s all too easy to construct worrisome stories that discourage you from making long-term investments.

After all, National Grid’s current UK business basically consists of operating electricity networks that are connected to a handful of big power stations and wind farms. Its gas network is similar.

What will happen if we all shift to microgeneration, with solar panels, fuel cells and battery packs in our garages? This kind of technology is becoming a reality and environmental concerns suggest it’s likely to happen. Will it make the grid redundant?

I think not. National Grid will need to change and invest in its network. But the idea that homes and businesses will go off-grid seems unlikely to me. To balance supply and demand and minimise pollution, I think it will be essential to be able to distribute energy efficiently across the UK.

Indeed, I think international energy trading is likely to expand, through greater use of undersea interconnectors. This is an area where National Grid has already been investing heavily.

Don’t forget the US

The other attraction that makes this firm stand out from UK utility rivals is that roughly half the group’s profits are now made in the USA. This adds a nice level of diversity to the business, in my opinion.

Regulatory risks will always be a concern, here and in the USA. The group’s profitability is restricted by what it’s allowed to charge. But National Grid’s long-term focus gives very predictable revenue and profits over multi-year periods. For income investors, I think this is a valuable asset.

As I write, the stock offers a 2019 forecast dividend yield of about 5.4%. In my view that’s a good starting point. I still see this as a great buy-and-hold choice for dividend investors.

I’m tempted by this newcomer

UK insurers are out of favour with investors at the moment. Many companies are struggling to deliver growth in a mature and competitive market.

FTSE 250 newcomer Sabre Insurance Group (LSE: SBRE) is no exception. But I don’t see this as a reason to avoid this motor insurer. Figures published today show that despite a rise in claims costs last year, the business remains very profitable.

Sabre’s focus on drivers who attract above-average premiums seems to support high profit margins. Today’s figures show that the business generated a return on tangible equity of 54.4% last year. This ratio is commonly used to measure the profitability of financial businesses, most of which produce much lower returns than this.

High returns on equity often go hand-in-hand with strong cash generation. That seems to be true here. Despite a 6% fall in adjusted pre-tax profit last year, Sabre generated enough surplus cash to support a 20p per share dividend.

At the last-seen share price of 286p, that gives the stock a 7% dividend yield. Analysts expect this figure to drop to 18.9p per share next year, giving a 6.4% yield. But I feel that Sabre’s profitability suggests it could be a good long-term income buy.

The post This is what I’d do about National Grid shares right now appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Personally, I’m not prepared to tie up my money for such poor returns. I prefer to invest most of my spare cash in dividend stocks.

Although the risks are greater than with cash savings, the potential returns are also higher. For investors with a long-term view, I think dividend stocks are still a great choice.

A long-term winner?

Shares in IG Group Holdings (LSE: IGG) were down by nearly 10% at the time of writing. The drop came after the company said new EU regulations had caused group revenue to fall by 6% to £251m during the six months to 30 November. Operating profit fell by 18% to £112.5m.

EU changes limit the amount of leverage available to retail customers trading contracts for difference (CFD). This has forced many to scale back their trading or quit altogether. Revenue from affected countries fell by 17% during the half year.

However, the news wasn’t all bad. During the second quarter, IG generated 69% of its EU revenue from professional clients, who are exempt from the rules. Cash generation remains strong with 89% — £100m — of six-month operating profit converted into surplus cash. The group also remains highly profitable, with an operating margin of 44%.

A bargain buy?

IG has a number of new services due to launch this year that should help to diversify its profits. IG’s new chief executive, June Felix, confirmed on Tuesday that she expects profits to return to growth in 2019/20.

In the meantime, the company has reiterated plans to maintain the dividend at 43.2p per share until it can be increased once more. After today’s share price fall, this payout provides a 7.4% yield.

A dividend cut is still possible, but in 13 years as a listed company, IG has never yet cut its payout. Today’s figures suggest to me that the payout looks safe unless trading worsens. I think the shares look good value at under 600p.

An under-the-radar income stock

One FTSE 250 name you probably haven’t heard is Sabre Insurance Group (LSE: SBRE). This motor insurance firm specialises in drivers who attract higher premiums. It floated on the London market in December 2017.

So far the shares have gone nowhere, but Sabre’s results to date suggest to me that it could be an attractive opportunity for income seekers.

Super profits

The company’s specialist focus appears to support very high profit margins. During the first nine months of 2018, Sabre generated a combined ratio below the group’s “mid-70%s target”. The combined ratio compares a company’s claims costs and operating expenses with its income from insurance premiums.

A combined ratio of less than 100% means that an insurer’s underwriting is profitable. A figure of between 70% and 75% is very good indeed. For shareholders, this should mean plenty of surplus cash to fund generous dividends.

Analysts certainly expect the group to perform well. They’re forecasting a payout of 19.1p per share for 2018, giving the stock a dividend yield of 7.1%. I believe Sabre could be a buy for income.

The post Forget about 1.5% from a cash ISA. I’d pick up 7% from these FTSE 250 dividend stocks appeared first on The Twelfth Magpie.

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Roland Head owns shares of IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

So if you didn’t notice this company hit the market, you’re not alone. And it looks as if Sabre is still failing to ignite investor interest. Over the past 11 months, the stock has barely budged. Today, the shares are trading just above the IPO price. 

Income champion

Despite what the rest of the market thinks, I believe Sabre could be a hidden income gem. The company, which operates the insurance businesses Go Girl, Insure2Drive and Drive Smart, is highly profitable and growing rapidly. Over the past four years, revenue growth has averaged 10% per annum, and net profit has increased by 21%.

But what really attracts me to the business is its income potential. City analysts believe the firm will throw off 18.6p per share to investors for 2018 and 2019, giving a dividend yield of 7.3% at current prices. Sabre has already paid out 7.2p as an interim payout and management is confident that the group is financially stable enough to offer investors a sizeable full-year payout.

Indeed, in a trading update issued today, CEO Geoff Carter said that, “having paid an interim dividend of 7.2 pence per share, the solvency capital ratio as at 30 September 2018 is at 195%, well above our target operating range of 140%-160%. This provides the board the option to return surplus capital to shareholders following the full-year results.“

This seems to hint that Sabre has the potential to reward investors with a payout that could exceed current City estimates. With this being the case, I reckon income investors should keep an eye on the enterprise. 

Cash-rich 

At first glance, car dealer Pendragon (LSE: PDG) does not seem to have much going for it. Car sales in the UK are starting to weaken, and City analysts have the group’s earnings per share sliding 12% for 2018.

However, there is more to this business than meets the eye. Pendragon has been diversifying away from its traditional business of selling cars over the past few years and is now a major retailer of software for other dealers. At the same time, the group has been growing its aftermarket sales business, where profit margins are significantly higher. 

As a result of these changes, I reckon the firm is better positioned than any of its peers to survive when the going gets tough. What’s more, Pendragon is divesting its US operations, which should eradicate the bulk of the group’s debt, improving its dividend credentials. 

Right now the stock supports a dividend yield of 6%, and the payout is covered 2.2 times by earnings per share. On top of this market-beating dividend yield, shares in the car dealer are changing hands for just 7.8 times forward earnings. 

So, if you’re looking for cheap income, I believe Pendragon is worth a closer look. 

The post Two 6%+ yielders that could give you a second income appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Pendragon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One explanation I’ve seen is that rising US interest rates are causing borrowing costs to rise, putting pressure on bank margins and household finances. It’s certainly true that the slump in banking shares hasn’t been restricted to Santander. Most UK and European banks have also seen their share prices fall.

As a shareholder, I’m still fairly bullish about the outlook for Santander. I believe it could be a good choice if you’re looking for dividend stocks to top up your state pension payments.

Despite this, there’s clearly a risk that my timing is wrong. So I’m also going to look at a mid-cap UK stock with a tempting 6.8% yield.

Long-term growth

One of Banco Santander’s main attractions for me is the group’s geographic diversity.

During the first half of this year, the bank’s attributable profit rose by 4% to €3,752m. Around 44% of this came from Latin American countries, mainly Brazil. A further 14% came from the UK, with 35% from the EU and 7% from the USA.

This heavy exposure to Latin America presents good opportunities for long-term growth, in my opinion. It also provides useful diversification away from the slow-growing EU and UK economies.

I’d keep buying

City analysts expect Santander’s earnings per share to rise by about 22% to €0.48 per share hit year. In 2019, a more modest gain of 8% is expected.

These forecasts put the stock on a 2018 forecast P/E of 8.8, with a dividend yield of 5.2%. With tangible asset backing worth 367p per share, I still think this bank should be a buy at 385p.

This 6.8% yield could be a better choice

Another sector that’s out of favour at the moment is insurance. I’ve written about some opportunities in this sector in recent weeks, but today I want to consider a new choice.

Motor insurer Sabre Insurance Group (LSE: SBRE) has been trading in various forms since 1982, but only arrived on the London Stock Exchange at the end of 2017. Sabre’s share price has remained largely unchanged since then. But we have learned more about this business over the last eight months.

In 2017, the group’s gross written premium (similar to revenue) rose by 7.1% to £210.7m. Underwriting profit rose by 5.5% to £59m, although investment losses meant that adjusted after-tax profit fell slightly to £53.3m.

The group’s profits remained stable during the first half of 2018, when adjusted after-tax profit rose by 11% to £26.1m. Chief executive Geoff Carter warned that the market “has entered a phase of weaker pricing”, but he expects the group’s specialist focus on drivers who attract higher premiums to provide some protection from the competition.

Spare cash

An increase in the group’s solvency ratio to 179% means that this regulatory measure is now above the company’s upper target of 160%. As a result, Mr Carter expects to be able to pay a special dividend later this year.

Sabre shares have dipped slightly today, following the sale of an 18% stake in the company by the group’s former private equity owner.

I don’t see this as a major concern. Indeed, I’m tempted by the group’s high level of profitability. Trading on 13 times forecast earnings and with a prospective yield of 6.8%, I’d rate Sabre as a buy.

The post Forget the Santander share price! This 6.8% yielder could top up your State Pension appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Roland Head owns shares of Banco Santander SA. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.