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Forget Lloyds and Barclays! I’d buy this stock for its 6.4% dividend yield

Kevin Godbold
A person holding onto a fan of twenty pound notes

Lloyds Banking Group and Barclays are both paying dividends yielding a little over 5%. But I don’t like the banking sector and see too much risk to the downside for those shareholders owning shares.

Instead, I’d rather invest in FTSE 250 financial services company IG (LSE: IGG), which provides CFD, forex, spread betting, and execution-only stockbroking services for traders and investors. With the share price close to 668p, the dividend yield is around 6.4%.

Dividend held firm

The company has a multi-year record of raising its dividend and hasn’t trimmed the payment, even in the teeth of difficult trading during the year to May, when earnings slipped by around 30%. Back then, regulators changed the rules relating to CFD and binary options trading, which affected some of the firm’s products.

In today’s pre-close statement, the company updated the market about performance in the first half of its trading year. The directors expect net trading revenue for the first six months to add up to around £250m, which compares with £251m in the equivalent period the year before. The firm explained in the report that last year’s half-time figures included two months of trading before the European Securities and Markets Authority (ESMA) product intervention measures came into effect. 

In the markets that IG considers to be core to its business, revenue is down around 6% to £210m. Meanwhile, the company explained that the “key” driver of growth in revenue in the medium term is the size and quality of the active client base, and the firm has been busy building the numbers up. At 78,500, the leveraged-clients-per-quarter figure for those active in the core markets during the period was 4% higher than the previous three quarters.

Growth opportunities

The directors pointed out that £40m of revenue in the period came from areas they’ve identified as “significant opportunities.” That figure is £12m higher than in the equivalent period last year. The outcome has been driven by “strong” performances in Japan and in Emerging Markets. On top of that, in October, the company started offering its German clients turbo24s, which are traded on its multilateral trading facility, Spectrum. The directors said the initial uptake has been “promising” and around 700 clients have traded turbo24s since launch.

It seems to me IG has stabilised its operations since last year’s regulatory crackdown and there are some encouraging areas of growth within the overall business. Meanwhile, City analysts following the firm expect the dividend to remain flat in the current trading year and the year after that.

I reckon the directors’ reluctance to cut the dividend is encouraging. The regulatory changes were difficult for the company but we could see a smoother road ahead. I’m tempted to pick up a few of the shares for that fat dividend yield. Right now, the forward-looking earnings multiple for the trading year to May 2021 is running just above 15. 

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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