The FTSE 250 index of mid-sized companies has fallen by nearly 25% over the last year. It’s easy to be discouraged by falling markets, but what I’m seeing are lots of good stocks to buy at cheap prices.
Today I want to look at two FTSE 250 dividend stocks I’d buy in November.
I’m loading up on this 10% yield
Motor insurer Direct Line Insurance (LSE: DLG) has been facing difficult market conditions. Used car prices have soared, while parts shortages have meant longer repair times for damaged cars. That’s led to higher bills for courtesy car hire.
Direct Line boss Penny James admits that the firm was caught out by surging inflation and was too slow to increase its prices. However, this has been a problem across the sector. Other UK insurers have reported similar headwinds.
The good news for shareholders is that insurance price rises are now being pushed through. In August, Ms James said that new policies were now being priced at the company’s target profit margins.
Reports I’ve heard from the motor trade also suggest that used car prices are starting to fall. Although some parts shortages persist, I’m confident this situation will gradually improve.
Over time, I think Direct Line’s strong brand and market share should help to repair its profit margins. I also expect rising interest rates to help insurers, as they should be able to earn higher returns from investing their premium cash.
The main risk I can see is that Direct Line won’t handle changing market conditions as successfully as some of its rivals. This could see the business lose market share or suffer lower profitability.
However, I’m willing to trust Direct Line’s track record and experienced management.
The shares now trade on a price/earnings ratio of 11, with a forecast dividend yield of 10%. I think that’s cheap and see this as a stock to buy now, ahead of a sector recovery.
A long-term opportunity
FTSE 250 housebuilder Redrow (LSE: RDW) reported record sales for the year ended 30 June. Underlying profits were also at a record high of £410m.
The company said that it was starting the financial year with a £1.4bn order book and expected steady demand for new homes, albeit lower than the last couple of years.
None of this good news did anything to help Redrow’s share price. The housebuilder’s stock fell after the results were announced and is down by more than 35% so far this year.
I think the risks are clear enough. Rising interest rates will make mortgages more expensive. There’s also the risk that in a recession, we could see a serious housing market slump. Broker forecasts suggest Redrow’s profits will fall this year.
On the other hand, I think it’s worth remembering that Redrow has navigated several previous housing market cycles successfully and has experienced management.
Another attraction for me is that its upmarket homes have an average selling price £428,000, so attract a more affluent type of buyer.
After this year’s falls, Redrow shares are trading below their book value and on a P/E ratio of five. There’s also a 7% dividend yield forecast for this year.
I think Redrow looks cheap today. I see this as a stock to buy for a long-term portfolio.
Roland Head has positions in Direct Line Insurance. 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.
Motley Fool UK 2022