It hasn’t escaped my notice that inflation is running a bit high at the moment. And with the value of savings eroding by the day, I think it’s more important than ever to avoid keeping anything beyond an emergency fund in a Cash ISA. After all, even the best-paying instant account returns a paltry 0.61% right now. Even though Cash ISAs are ‘safer’, I think the best place for my money is the stock market, especially as there are lots of cheap dividend stocks to buy out there.
Let’s look at a couple, one of which reported to the market this morning.
Cheap dividend stock
I think self-styled “purpose-led global financial technology business“ IG Group (LSE: IGG) is a great way of tackling inflation. The online trading provider has actually been a core holding in my own Stock and Shares ISA for quite a while, partly due to the cash it keeps churning out. And based on today’s half-year results, I have no concerns about this trend continuing.
This morning, IG announced a record first-half performance. Net trading revenue increased 16% to £471.9m over the six months to the end of November. Pre-tax profit also rose 8% to £245.2m. That’s pretty impressive stuff considering that markets were fairly stable over the period (IG makes money when traders try to capitalise on volatility).
As encouraging as all this is, it’s the dividends I’m after. Today, the FTSE 250 member elected to keep its interim payout steady at 12.96p per share. Assuming the full-year cash return stays at 43.2p, that means IG yields 4.9% — eight times what the best Cash ISA will give me.
Will this be sufficient to beat inflation? I don’t know. But it’s definitely worth the extra risk that comes with investing, in my opinion. This is especially true given how much (or how little) buyers are being asked to pay to acquire this quality stock.
At yesterday’s close, IG shares traded at just 11 times earnings. While the threat of further industry regulation may go some way to explaining this valuation (and dividends are never guaranteed), I’d have no issue buying more.
Another option
Of course, IG isn’t the only cheap dividend stock out there. Shares in Polar Capital Holdings (LSE: POLR) also grab my attention.
The fund manager’s price has tumbled 19% in 2022 to date as investors have become increasingly skittish. As far as I can see, it’s nothing to do with Polar itself.
To be frank, none of this should really bother me if I’m looking to generate passive income and/or beat inflation. Analysts believe Polar will return 42.4p to investors in the current financial year. At today’s share price, that becomes a monster yield of 6.6%.
Too good to be true? Well, the recent volatility in markets will likely mean that the mid-cap’s next set of numbers may not impress. Asset managers typically don’t do very well when clients are clamouring to withdraw their cash.
Still, the extent to which dividends will be covered by expected profits (1.4 times) looks reasonable. Polar is not one to slash its payout anyway. Based on its track record over recent years, the company is more likely to maintain rather than reduce cash returns when times get tough.
Also changing hands for 11 times earnings, I’d be happy to add Polar Capital to my ISA today.
