I’d invest £500 in this high dividend yielding stock in 2020

A new year might have begun, but not much has changed in the stock market fortunes of post and parcel delivery service provider Royal Mail (LSE:RMG). Even though the share price picked up after the election results last month, it’s already softening in January. And I don’t think that it will pick up either, going by the company’s structural issues. 

It has ongoing human resource problems, with instability at the top management and persistent conflict with its strong workers’ union. Added to that, the business itself is far from being fast growing. Yet, I think there’s a strong case for investing in RMG. 

Sustained high dividend yield 

Royal Mail’s double-digit dividend yield, at 11.2% at the latest price, just can’t be ignored. Arguably, the yield has benefited from a fall in the share price over the past months. In January 2020 so far, the price is 15% less than at the same time last year. Even with a cut to dividends from this year onwards, to 15p from 25p per share last year, the yield is still at 6.8%, which is also fairly high. 

In fact, taking into account RMG’s somewhat pessimistic outlook for 2020/21, I think the investor’s dividend yield can benefit from share price dips during 2020. In addition to considering dividend yields based on the current share price, which is the norm, I also like to look at the yield based on the price at which the investment was made.  

Potential for high income 

So, for instance, if the share price drops to 179p, which was the lowest price seen in the past year, with a 15p dividend, the income on my investments would be at a rate of 8.3%. This is 2.5 percentage points higher than the income earned at the current share price of 223p. In other words, investments in the same stock can generate different yields based on the share price at which they were made. If I had invested in Royal Mail at the highest share price seen last year, of 281p, the dividend yield on my investments at 15p per share would be 5.3%, higher than the FTSE 100 average yield of 4.3%.

The difficulty of course, is in timing the purchase. If you are actively seeking investing opportunities, I would encourage keeping Royal Mail on the radar. 

Long-term security likely 

I am further encouraged by RMG’s plan to maintain dividends at 15p up to 2024, even with its current problems. Could it cut dividends going forward? It’s possible, but the more important question to me is – has it cut dividends in the past? Before the latest announcement, its dividends grew for at least five years. In so far as the earnings are ploughed back constructively into the company and given its history of good dividends, I’m not too worried right now. I’m looking for an opportunity to invest.  

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Manika Premsingh 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.

Motley Fool UK 2020