Forget a cash ISA! I’d pick up an 8% dividend yield from FTSE 250-member Saga

Hand holding pound notes
Hand holding pound notes

While cash ISAs have been popular in previous years, the reality is that they’re unlikely to generate positive returns once inflation (currently standing at 2.3%) has been factored in. Obtaining a return on a cash ISA of more than 1.5% is challenging at present, which means any amount invested is set to be worth less in future than it is today, in real terms.

In contrast, FTSE 250-listed Saga(LSE: SAGA) offers a dividend yield of over 8%. This suggests it could generate high returns, with a margin of safety appearing to be on offer. After a disappointing share price performance, the travel and finance company targeting the over-50s could deliver a sound recovery, alongside a smaller dividend stock which released some positive news on Monday.

Improving performance

The company in question is Real Estate Investors(LSE: RLE). The Birmingham-focused real estate investment trust (REIT) is seeing an increase in tenant demand across its portfolio. Its number of tenants increased by 4.3% to 269 in 2018, while its occupancy level of 96.1% is 2.2 percentage points higher than in the previous year, representing a record level for the company.

The business intends to continue to focus on existing opportunities within its portfolio. It recently acquired a mixed-use scheme called The Quadrant in Redditch for £3m, which represents a net initial yield of 12.2%. Although it’s aware of potential economic challenges, it continues to seek expansion opportunities.

With a dividend yield of 7.7%, Real Estate investors could have income investing potential. Clearly, it’s a relatively small business which operates in a narrow geographical area. However, with a price-to-book (P/B) ratio of 0.8, it could offer a wide margin of safety.

Recovery potential

Also trading at a relatively low valuation is Saga. As mentioned, it’s experienced a disappointing share price performance in recent months, following the FTSE 250 lower while being hurt by difficult operating conditions. They have caused its financial outlook to remain somewhat challenged, with profit growth expected to be minimal over the next couple of years.

From an income investing perspective, though, the stock could have significant appeal. Its dividend yield stands at 8.6%, which is 3.7 times the current rate of inflation. Dividend payouts are expected to be covered 1.5 times by profit in the current year, which suggests that they are affordable and could even rise over the medium term.

In terms of Saga’s valuation, its price-to-earnings (P/E) ratio of 7.9 suggests that it offers a margin of safety. Its bottom line is forecast to return to growth in the next financial year, while a refocused strategy could help to enhance its financial returns. At a time when a number of FTSE 350 shares yield over 5%, the stock could offer a mix of dividend appeal, value-investing potential and recovery prospects over the long run.

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Peter Stephens owns shares of Saga. 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.

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