These dividend shares now trade on appealing valuations. Time to buy?
A rising inflation rate has meant that high-yield shares are once again in demand among investors. Of course, there is much more to a company's income potential than simply a high yield. Its financial strength, industry outlook, strategy and valuation are also very important. With that in mind, are these two higher-yielding shares worth buying for the long run?
Reporting on Monday was CFD provider Plus500(LSE: PLUS). Its share price gained 5% following the update, since it has traded significantly ahead of market expectations. It now expects revenue and profit for the year to be significantly ahead of current expectations. This was because of strong new customer sign-ups and reduced average user acquisition cost. This has delivered a higher EBITDA (earnings before interest, tax, depreciation and amortisation) margin than during the same period of last year.
Despite this, the company's outlook remains highly uncertain. The regulator in the UK, as well as in Europe, is mulling over new rules to change the industry in response to concerns surrounding the complexity of products available to private investors. This could have a negative impact on Plus500's future profitability, although just last week it was announced that there would be a delay to the implementation of any regulatory changes in this regard. They are now due to come into force next year.
With Plus500 yielding 6.2% from a dividend which is covered around 1.4 times by profit, it seems to offer impressive income potential. Certainly, its returns could be high. But, equally, its risks remain considerable given the expected changes in regulations which may be ahead. Therefore, it may only be a stock of interest to less risk-averse investors.
Also facing an uncertain outlook is sector peer IG Group(LSE: IGG). It could be negatively impacted by Europe-wide changes to how CFDs are marketed to private investors, as well as tighter limits on leverage levels which may limit the maximum losses which can be recorded by individual investors.
Still, some investors will be tempted by an investment in IG. It has been a highly successful business in recent years, and has become a dominant player within its industry. It now yields around 6.1% from a dividend which is covered 1.3 times by profit.
This suggests that if regulatory changes are negative, the business may not be able to afford to offer dividend growth over the medium term. Given that one of the cornerstones of income investing is a sustainable and growing payout for investors, the uncertainty facing IG could make it relatively unappealing for some more cautious dividend investors.
Certainly, external factors mean that its outlook is difficult to quantify. However, it has a strong position and sound strategy. With a price-to-earnings (P/E) ratio of 12.8, it could still offer a sufficiently wide margin of safety to merit investment for the long term.
Peter Stephens owns shares of IG Group Holdings. 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.