A 7% FTSE 100 dividend stock I'd buy instead of Carnival plc

Shares in cruise operate Carnival(LSE: CCL) picked up a couple of percent Thursday afternoon on the release of pleasing first-quarter figures.

Adjusted revenue for the three months to 28 February came in at $375m, nicely ahead of the $279m recorded for the same period last year. Net revenue yields at constant currency firmed up by 3.9%, beating December's prediction of 2.5%, and non-fuel cruise costs rose by a modest 1% -- fuel costs rose, but were offset by currency changes.

Cumulative advanced bookings are in line with last year, at higher prices, and the company expects full-year adjusted EPS in the range of $4.20 to $4.40. That's a rise of 10%-15%, which is impressive.

These figures will be welcomed by shareholders who have seen their shares sliding since August 2017, but Carnival just doesn't strike me as one I'd want to buy. Why is that?

Growth over?

Over five years, Carnival shares have more than doubled while the FTSE 100 has managed a meagre 9%. That came after years in the doldrums, but I can't help seeing the shares as fully valued now.

The valuation is fair but not enticing -- the mooted 10% EPS rise suggests a forward P/E of 15-16, which to me is on the "meh" side of average. And dividend yields, at around 2.5%-3%, are nothing to shout about. Certainly not when the FTSE 100 is offering an unusually high average dividend yield of around 4.3%, and some of the best yielders are providing 6%-7% and more.

On the plus side, Carnival is continuing with its longstanding share buyback process, and the popularity of its offerings is likely to remain strong, especially as populations age. I just see better Footsie buys.

Insurance cash

The insurance sector has long been one of my favourites, despite its occasionally erratic nature -- on top of the short-term vagaries of insurance risk itself, many operators are heavily into investment too and the financial crisis hurt them badly.

I particularly like Direct Line Insurance Group(LSE: DLG). In the retail insurance market, the company owns the high-profile Direct Line and Churchill insurance brands, together with the Green Flag auto rescue service.

I'm especially attracted to Direct Line's dividend policy, which is to pay a solid ordinary dividend every year, and top it up with a special dividend according to how much cash it has to return to shareholders. 

The firm did exactly that again for 2017 when results were released at the end of February. Shareholders were rewarded with a total ordinary dividend of 20.4p per share, to which was added a very nice special dividend of 15p per share. The total, of 35.4p, represents a yield of 9.2% on today's share price of 386p.

Specials

Now, we're surely not going to be seeing 9% every year, but even Direct Line's ordinary payment of 20.4p means a yield of 5.3%, and if that proves to be a reliable baseline then we could be looking at one of the FTSE's best long-term cash cows.

Special payments have been consistent for a few years now, and there's a total of 7% currently forecast for 2018, so I don't see any sign of having to fall back on just the ordinary dividend just yet.

A below-average P/E of 12 puts the icing on it for me, and I see Direct Line as a buy.

Buy-And-Hold Investing

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. 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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