Happy new year first of all! 2019 ended nicely with a Santa Rally and most shares in the FTSE 350 will have done well last month with some notable exceptions like Tullow Oil.
Looking forward, there’s a lot to be optimistic about in 2020 and some analysts seem to be suggesting that the FTSE 100 could break the 8,000 mark – something I’m very sceptical about given Brexit uncertainty – there’s bound to be headaches with trade negotiations which will affect investor confidence – and there’ll be a Presidential election in the US in November. I do though keep faith in my belief that by investing in solid companies paying out a high and growing dividend yield, investors should do well.
With that in mind, these are the three shares from the FTSE 350 that I think could do particularly well.
Renewables Infrastructure Group (TRIG)
I’d only heard of this company recently, but I think it looks investible. It’s stated purpose is to generate sustainable returns from a diversified portfolio of renewables infrastructure (wow what a surprise!) that contribute towards a zero-carbon future. It’s ideally suited to an ethical investor but also for those seeking income and growth.
The investment trust has a yield of just under 5% and the share price climbed throughout 2019. Dividend cover has been increasing year on year even while the dividend has been steadily growing, making it seem like a well-run, sustainable (excuse the pun!) business. For investors keen to live off their income rather than reinvest it, the trust pays the dividend quarterly which is a nice little bonus.
TRIG invests principally in a diversified portfolio of renewable energy infrastructure assets in the UK and Europe, with a focus on operating projects. Its portfolio comprises over 70 assets in the UK, France, Ireland, Sweden and Germany and includes wind farms, solar projects and one battery storage asset with a total aggregate generating capacity in excess of 1.5GW. Wind is by far the biggest part of the group’s assets.
The trust is run by InfraRed, a London-based international investment manager with c.$13bn of equity under management and RES, a leading global developer and operator of renewable infrastructure projects.
Interest in investing in renewable energy is only going to grow in my opinion with the cost of delivering energy this way coming down all the time. Better economics and less reliance on government subsidies should drive up investment in the sector.
When special dividends are included, Direct Line’s dividend yield is an eye-watering 9%. The dividend is probably what appeals most about the insurer. Although the group did reveal at the end of last year that the current share price means its preference is to return surplus capital to shareholders through share buybacks instead of through special dividends.
The share price of the group has been pretty much flat over the last 12 months, which means it has underperformed the FTSE 250, which grew strongly in 2019, especially in the latter months. The underperformance of the share price must be down to the perceptions of the challenges the insurer – like its peers – faces.
It’s hard to get pricing power in the insurance market and comparison sites, although hardly new, have only made that problem worse. Price cutting is common making profitability much harder to come by. This competition alongside changes to the Ogden rate which affects insurance payouts is pressuring share prices down. Fears around growth in the car market may also be a factor.
The shares might do well this year though because the insurer is committed to reducing its costs and making greater use of technology. Direct Line wants to bring its operating costs down to 20% of premiums by the end of 2023, compared to 23.4% last year. The insurer also believes lower capital spending going forward and £50m of cost-cutting can generate an extra £100m of capital each year.
There’s a lot going for the group even though its tough in the insurance industry right now. This means the shares are trading on a P/E of less than 10. Although special dividends might stop this year investors still get a yield of over 6% which I think is a generous reward while they wait for the insurer’s cost-cutting measures and revival to happen.
This is a share I’ve owned for a few years – attracted to the high margins and its lack of exposure to the London property market unlike some of its other listed peers. The high dividend yield was always attractive as well and has grown as the share price has struggled since reaching a 5-year high in June 2018, so that it now sits around 8%. This well above the average for the FTSE 100 and compares favourably with rivals such as Berkeley and Barratt Developments which have yields of 0.5% and 6% respectively.
After a bad second half to 2018, last year the share price rose, ending the year up by over a third. The improvement was part to do with a general rise in the stock market in December after the Conservative election victory, but before that, a change in CEO and a focus on build quality had helped the share price recover. The fall at the end of 2018 made the shares too cheap as well. Even now with the share price recovering, the shares have a P/E of less than 10, meaning I think the recovery could continue this year.
The shares still have some obstacles to overcome, the group has taken a reputational hit from the row over its former boss’s pay and from poor build quality. And yet other builders have recovered from similar embarrassments and I expect Persimmon to be able to keep progressing in 2020.