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Forget the Cash ISA! I’d buy this FTSE 250 dividend stock for 2020 instead

Rupert Hargreaves
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At the beginning of 2019, I picked out FTSE 250 financial services giant IG Group (LSE: IGG) as my top stock for the year. 

After a rough 2018, I believed that the company was on track for a comeback in 2019 as management refocused the business for growth by redeploying assets into growth markets, away from its mature domestic market here in the UK.

Nearly 12 months on and it looks as if my call to buy IG was incredibly well-timed. Year-to-date the stock has returned just under 27%, outperforming the FTSE 100 by 14% over the same period, including dividends. Over the past 12 months, the stock has outperformed the market by more than 11%, including dividends.

Room for further growth?

Even though shares in IG have outperformed the market in the past year, I think this stock still looks like an excellent investment at current levels.

City analysts are expecting the financial services group to report a slight decline in earnings for this year. Regulations introduced across Europe over the past 24 months to try to curb losses retail investors make on highly speculative trading products have weighed on earnings.

Still, as the company adapts to the new regulatory environment, analysts believe IG will return to growth in its 2021 financial year. Earnings will fall by around 7% for fiscal 2020, the City believes, before making a recovery in 2021. Analysts have pencilled in earnings growth of 12% for the year. 

These forecasts put the stock on a forward earnings multiple of 15.3. That’s nearly 50% more expensive than when I recommended the stock at the beginning of 2019. However, considering IG’s improved outlook, I think it is a price worth paying. 

Income champion

Another reason why investors were selling shares in IG this time last year was that analysts were unsure whether or not the group would be able to maintain its dividend because earnings were on track to decline for the full year.

The good news is, over the past 12 months, the company has proven to the market that the distribution is here to stay. For that reason, if you are looking for income, I think you can depend on IG’s current 6.4% dividend, which is more than four times higher than the best Cash ISA interest rate on the market at the moment. 

A yield of 6.4% implies that even if the stock goes nowhere in 2020, it will be a better investment than cash in the year ahead. 

The bottom line

So all in all, investors who followed my tip and bought IG at the beginning of 2019, have done exceptionally well in 2019.

However, I think IG’s recovery is only just getting started, and as the company returns to growth over the next few years, I reckon that could be further upside on offer for investors who are willing to hold on to the shares.

On top of this capital growth potential, the stock also supports a market-beating dividend yield so investors will be paid to wait for IG’s growth to take off. 

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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.

Motley Fool UK 2019