Picture supply: Getty Photos
Relating to constructing a second revenue via investing, dividend shares stay one of the crucial dependable instruments within the field. A well-diversified basket of corporations with robust money flows can present a gentle stream of revenue that grows alongside inflation.
Nonetheless, it’s not sufficient to easily chase the best yields on provide. A dividend must be sustainable, backed by a powerful observe report of funds and ideally supported by earnings development.
Discovering yields above 7% may be particularly tempting, however buyers should be cautious of ‘dividend traps’ – corporations that pay huge dividends till the second earnings falter and the payout’s slashed. With that in thoughts, I’ve been trying to find alternatives the place the headline yield appears enticing, however the fundamentals additionally stack up.
One small-cap insurer has caught my consideration: Sabre Insurance coverage Group (LSE: SBRE).
Specialist automotive insurance coverage
Sabre Insurance coverage Group’s a UK-based motor insurer that sells insurance policies primarily via brokers, but additionally on to the general public through its Insure 2 Drive, Go Woman and Drive Good manufacturers. What makes it a bit totally different from mainstream insurers is its give attention to higher-risk drivers and specialist strains, together with bikes and taxis.
This technique requires extra refined underwriting, because the dangers are extra advanced than commonplace automotive insurance coverage. However the trade-off is greater revenue margins.
In fact, there’s a flip aspect – the marketplace for these specialised merchandise is smaller, which might restrict long-term development prospects. Increasing into different areas would convey it into direct competitors with giants corresponding to Direct Line and Admiral. The share value, which is down practically 46% over the previous 5 years, arguably displays this slower development profile.
Robust revenue potential
The place Sabre does shine nonetheless, is in its enchantment to income-focused buyers. The dividend yield presently stands at a formidable 10%, with the following payout of three.4p per share due on 24 September.
The payout ratio sits at simply over 91%, which can appear excessive however isn’t uncommon for insurers. Extra importantly, the dividend’s backed by a constant report: seven years of funds and two years of consecutive development.
The newest development figures are putting – the full-year dividend leapt from 4p per share in 2022 to 13p in 2024, a rise of 44% yr on yr. That’s a critical dedication to rewarding shareholders.
Is the enterprise stable?
Trying below the bonnet, Sabre’s stability sheet reveals no debt and property comfortably protecting its liabilities. Its web margin has doubled from 6% to 14% in simply two years, whereas the price-to-earnings (P/E) ratio’s fallen from 24 to below 10, leaving the inventory trying undervalued in comparison with friends.
Earnings have additionally crushed expectations for 4 years operating, suggesting administration has a great deal with on underwriting dangers.
So whereas the share value decline might give some buyers pause, the corporate’s monetary well being and bettering earnings image make me extra optimistic.
For these in search of to construct a second revenue, Sabre appears like a dependable dividend-payer to contemplate, because it might assist enhance the typical yield of a portfolio.
