Have £2,000 to invest? I think this FTSE 250 stock with a 4.7% yield is worth considering

Person using calculator next to charts and graphs
Person using calculator next to charts and graphs

Gold miner Centamin (LSE: CEY) is a FTSE 250 stock that’s trading on an attractive earnings rating. It also offers a prospective dividend yield of 4.7%, rising to 5.5% next year. Meanwhile, smaller-cap miner Gem Diamonds (LSE: GEMD), which released a strong Q3 trading update today, is on an even cheaper earnings rating but with only a small dividend pencilled in for next year. If I had £2,000 to invest today, would I plump for just one of these stocks or divide my investment between the two?

Gold plus cash

Centamin, whose assets are in Egypt, is a stock I think is well worth considering. I reckon it’s good to have some exposure to gold in a diversified portfolio, as it can provide a bit of stability in times of trouble.

ETFS Physical Gold, which simply tracks the price of gold, less a small annual management charge, is one stock I’d be happy to buy today. However, Centamin offers something you don’t get from the metal itself. Those valuable cash dividends I mentioned earlier. I think this reward more than offsets the business risk and a share price that tends to be more volatile than the gold price, due to miners being largely a geared play on the metal.

In addition to its appealing dividend yield, I reckon Centamin’s price-to-earnings (P/E) ratio and price-to-earnings growth (PEG) ratio, based on earnings projections for 2019, are attractive at a current share price of around 100p. With 25% earnings growth forecast for the year, the P/E is an undemanding 12.7 and the PEG is 0.5, which is well to the ‘good value’ side of the PEG ‘fair value’ marker of one. As such, I’d be happy to buy this stock today.

Valuable diamonds

Gem Diamonds is a smaller company. Its market capitalisation of £153m at a share price of 110p (up around 2% on the back of this morning’s results) compares with Centamin’s £1.2bn. Nevertheless, might it be wise to split an investment between the two stocks?

Gem has recovered 13 diamonds greater than 100 carats from its Letšeng mine in Lesotho (southern Africa) so far this year, which already surpasses its previous highest number of these recoveries in a single calendar year. Ongoing technical improvements at the mine have improved recoveries and there should be more to come with the company set to commission a plant for the early detection of large diamonds and diamond damage reduction in Q2 2019.

In view of this, I’m not sure why City analysts are forecasting a decline in earnings in 2019. Perhaps 2018 is viewed as a one-off bumper year. However, even on the reduced earnings forecast, Gem’s P/E is a very cheap-looking 7.7. Furthermore, management has been focused on improving cash flows and with the board having a policy “to pay a dividend to shareholders when the financial position of the company permits,” analysts are forecasting a payout in 2019, albeit at a token level at this stage.

Due to the prospect of improving shareholder returns, including in the tangible form of cash dividends, and the benefit not only of reducing company-specific risk, but also diversifying geopolitical risk, I would lean towards splitting my investment. And at their current valuations, both stocks look very buyable to me.

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G A Chester has no position in any of the shares mentioned. 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.