These high-yield British stocks look like safe and sound bets

What are high dividend stocks? Well, 10-year UK gilts yield about 3.4%. Average yield on FTSE All-Share is 3.64%. I want a high-yield option to comfortably beat these two benchmarks so I want to settle at around 5.5% and above. However, the higher the yield, the higher the risk.

When the stock price goes down, the yield goes up. And stock prices tend to fall when a company’s prospects deteriorate. I don’t want to buy stocks promising big dividends only to see it cut because it’s unsustainable. While there are no guarantees in investment, of course, there are some stocks that logically seem like safer and sounder bets than others. So, for me to be interested, high yielding stocks should also provide a margin of safety.

Close the dividend

IG group, a trading platform and product provider for retail and corporate customers, has a forward dividend yield of 5.8%. The dividend coverage is expected to be at least 2.15 throughout 2023 and 2024. That means it is expected to earn more than twice what it pays to shareholders. This is a good margin of safety, which makes this stock look like a safe and sound bet.

Save on Save Northgate, which leases, maintains, and manages vehicles for business customers, yields a forward dividend of 5.7%. Dividend coverage is expected to be at least 2.15 in 2022 and 2023. reach has a forward yield of 8.25%. That seems extreme, but the dividend cover in national and regional news publishers is forecast to be at least 3.13 for this year and next.

In addition to covering their dividends well, all three have manageable debt levels. Debt holders get interest payments before dividends are taken into account. So, for dividend stocks to look safe and sound, I’d like to see operating income at least 10 times higher than interest payments: IG Group, Redde, and Reach have an interest cover of more than 10, which is encouraging.

High yield stocks

I want dividend stocks to yield more than I can reinvest in the business. The best use of that excess cash is going back to shareholders. So I look at the cumulative free cash flow per share and dividends per share over the past five years. Here Redde lets loose as it has paid a dividend of 102.8p per share and generated 72.1p of free cash flow cumulatively over five years. That leaves me with IG Group and Reach, which generated surpluses of 262.9p and 87.57p respectively.

However, I won’t be buying for my Stocks and Shares ISA. Reach and IG Group are two high-yielding UK stocks appear Safe and sound based screen is enough but simple. If it was that easy everyone would do it. Layar is a great idea generator, but I need to dig more into both businesses before I can be convinced to buy.