Image source: Getty Images
It’s been a strong month for some of the UK’s lesser-known income stocks, with a few impressive share price gains catching investors’ attention.
That often leads to one of the market’s quirks: as share prices rise, dividend yields usually fall. It’s a simple relationship — the same payout spread over a higher share price means a smaller percentage return.
Take Imperial Brands as an example. Its yield’s dropped from around 8% to 6.2% this year, as the share price climbed nearly 40%. That’s great news for long-term shareholders, but it also makes the stock less appealing for those looking to buy in now.
When yields fall, income investors often start searching elsewhere for opportunities.
Of course, the opposite can also happen. When a company’s share price drops sharply, its yield can look very attractive on paper – but that’s not always a good thing. A soaring yield might signal that investors have lost confidence in the firm’s ability to maintain payouts.
For that reason, a stock that manages to hold on to a high yield while its price is rising is often worth a closer look.
Digging deeper
That’s what caught my attention this week. Zigup (LSE: ZIG), the commercial vehicle hire and accident management company operating across the UK, Ireland, and Spain, has seen its share price jump 10% in recent weeks.
Despite that rise, it’s still yielding an impressive 8%, and the dividend’s comfortably covered by earnings.
Since 2015, payouts have grown at a compound annual rate of around 6%. Analysts seem optimistic too, with the average 12-month forecast suggesting a 43% increase from current levels.
For an income-focused investor, that combination of growth potential and income looks promising.
However, there are reasons to be cautious. Zigup’s balance sheet’s healthy for now, but margins are thin and cash flow remains minimal. If profits slip, the firm may need to extend its debt, and that could quickly put dividend payments under pressure.
In my view, that risk negates its long-term appeal as a passive income pick. It’s not that the business is in trouble, but the lack of financial flexibility leaves little room for error.
A better option?
By contrast, I think TP ICAP (LSE: TCAP) offers a stronger mix of stability and yield. Like Zigup, it’s a FTSE 250 income stock, but with far more robust financials. The group – best known for its interdealer brokerage operations – boasts twice as much equity as debt and generates consistent cash flow.
Profit margins aren’t spectacular, yet they’re sufficient to sustain a dividend track record spanning over two decades. After a brief cut during the pandemic, payouts have bounced back solidly.
That’s not to say it’s risk-free. The rapid rise of electronic and automated trading could gradually erode the company’s relevance if it fails to innovate fast enough.
Still, for now, I think it stands out as a well-managed, dependable dividend payer that income investors should consider as part of a diversified portfolio.
When it comes to dividends, a stable business often trumps a high yield. For my money, TP ICAP fits that bill nicely.
