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£1,000 to invest? I’d pocket this 9% dividend yield

Roland Head
Compass pointing towards 'best price'

If you’ve got £1,000 to invest, where should you start? One of the difficulties of stock market investing is that there are so many choices. Too many choices, sometimes.

I think it’s important to choose an investing style to help focus your choices. My preference is to invest in shares that offer a high dividend yield. In my experience this offers two advantages.

Firstly, I find it’s much easier to hold stocks through periods of uncertainty if I’m receiving a regular cash income.

Secondly, high yields are often a sign of companies that are out of favour or struggling to grow. Quite often, these problems are resolved over time. The shares then rise, providing me with an attractive capital gain.

I’ve turned positive on this stock

My first pick is definitely a turnaround situation. Cycle and motoring retailer Halfords Group (LSE: HFD) has been struggling with slowing sales and falling profits for several years. But the Halfords share price is up by 7% at the time of writing, thanks to a strong performance over Christmas.

The group says that total sales rose by 4.6% during the three months to 3 January. This represents a 1.3% increase in like-for-like sales. Cycling sales rose by 5.9%, with growth “across the bike categories”, including electric bikes and kids’ models.

Although sales of car parts and motoring accessories fell by 2.7%, revenue from the Autocentres car servicing business rose by 4.6%.

Boss Graham Stapleton warned that “market conditions remained subdued”. But Halfords’ performance is a big improvement on the first half of last year, when sales fell by 2.9%.

Mr Stapleton confirmed that full-year profits should be in line with expectations. That leaves Halfords trading on a modest 7.5 times forecast earnings, with a dividend yield of 9.1%.

Looking ahead, Mr Stapleton has already pencilled in a dividend cut from 14p to 12p per share for 2020/21. But this reduced payout looks affordable to me and would still give the stock a yield of 7.7%. I think the retailer is starting to look like a decent recovery buy.

A safer choice?

Although I’m turning positive on Halfords, the well-known retailer isn’t out of the woods yet. Profits have been falling since 2015 and there’s not yet any sign of a return to earnings growth.

I believe that a much safer pick in the retail sector is Wm Morrison Supermarkets (LSE: MRW). This major retailer benefits from excellent management and its own food production business. This has allowed Morrisons to expand into the wholesale market with very little extra investment.

For example, instead of operating its own chain of convenience stores, the firm supplies more than 1,300 stores operated by McColl’s. Morrisons also has a deal to supply Amazon‘s home grocery service.

The supermarket sector is a tough, competitive market, but I see Morrisons as a differentiated firm with good cash generation and strong management. The shares currently trade on about 14 times forecast earnings, with a dividend yield of 4.7%. In my view, this could be a decent time to buy.

The post £1,000 to invest? I’d pocket this 9% dividend yield appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended McColl's Retail. 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.

Motley Fool UK 2020