Could this UK stock be the dividend star of 2024?

Investing in dividend stocks is one of my favorite passive income ideas. However, as investors often say, past performance is not always a guide to what will happen next. For example, last month, a well-known British stock that had been paying a double percentage dividend quickly canceled its payment.

But I see reason to think juicy dividends could return in the near future. So, should I add stocks to my portfolio now in hopes of good dividends in a year or two?

falling star

These segments are insurance companies and financial services groups Direct Line (LSE: DLG).

In one sense, the dividend cut should not come as a surprise. The high yield offered before the announcement is an indication that at least some investors have doubts about its sustainability.

While cancellations largely explain the 21% decline in share prices this year, they are also down 39% over the past year. Clearly Direct Line is losing popularity despite keeping the dividend.

Business results have been shaky. Revenues and profits both fell in the latest annual results. In November, it reported a decline in profits for the first nine months of 2022, but said that, “the dividend capacity outlook remains unchanged“.

Bull case

So it’s surprising that the company canceled its dividend just a few months later. The core competence of an insurance company is to recognize the risk beforehand, after all.

That represents incompetent management in my view. The former chief executive has left.

But is it as bad as the cancellation suggests?

Direct Line remains profitable. Withdrawing dividends means that the cash that will be used to pay the company is kept inside the business.

Demand for financial services may be resilient. Direct Line has a strong brand that helps attract customers. Our UK focus helps make doing business easier than our global competitors.

It has proven in the past that having a consistently profitable business can fund large dividends. I hope that under the new management they will be able to do it again. That could see the meaty dividend being brought back next year if things go well.

The case of the bear

However, are the company’s woes confined to its former chief executive?

I question how effective the board of directors is, given the change in tone between November and January. None of the directors took advantage of the fall in prices since the January announcement to buy shares of any size (there were some fairly small purchases as part of the incentive scheme).

Direct Line saw the number of policies it took out fall by 10.2% year-on-year in the first nine months of last year. Those who share the brand may have lost their light.

Is this UK stock for me?

In the long term, I think Direct Line may have what it takes to return to previous levels of profits and dividends. If that happens, buying today for my portfolio could mean I get a huge income stream in the future.

But I’m not sure the company will recover quickly, if at all. Facing many challenges. I will pay attention to the results next month – but will not invest now.