Focusing on above-average yields

To generate a monthly passive income, an investor would need to hold a diversified portfolio of stocks. It’s incredibly rare to own a single company and expect to receive dividends every month. Further, it’s a high-risk play to own a single company and hope the dividend keeps getting paid and don’t get cut. If this happens in the future, the overall strategy falls apart. Rather, if someone owns a dozen or more stocks, the impact can be minimised.

A lot of focus will be on making the capital work hard. As such, I don’t see much value in buying stocks with a divdend yield at or below the index average. For example, the FTSE 100 average yield is currently 2.92%. So the strategy would be to target FTSE shares with a yield well in excess of this. Based on what other stocks offer, I think a sustainable portfolio can be built with shares yielding around 7%.

In theory, let’s assume someone invested £600 a month in a portfolio yielding 7% and reinvested the proceeds. By year 15, this could be paying out an average of £1,055 a month. Of course, it’s impossible to say for certain that the goal will be reached at this point. Planning this far into the future isn’t an exact science, and many factors could mean it takes longer (or shorter) to achieve.

European expansion

One idea to include in this portfolio could be ZIGUP (LSE:ZIG). It’s a FTSE 250-listed mobility services group, with the share price up 28% over the past year. It currently has a dividend yield bang on 7%.

The business primarily makes money from charging clients to use commercial vehicles. Rental revenue has been a major driver of growth, especially with higher demand in Spain and the UK. Half-year results from December showed revenue up 16.3% for Spain. In comparison, UK and Ireland revenue was up 6.5%.

At the same time, it generates recurring income from maintenance, repair, and fleet-management contracts. This is the part of the business that provides steady revenue and helps to ensure the dividend is covered from earnings. In fact, the latest dividend cover ratio is 2.9, which means the earnings can cover the latest dividend almost three times over.

In terms of risks, business demand tends to follow the broader economic cycle. If we saw a downturn in the UK and Europe, people might decide to cut back on vehicle hire. Or the company might have to cut profit margins to sustain demand.

Even with this, I think it’s a stable dividend stock that could be considered by investors.

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Adding everything together

Assuming a 30-day month, cutting out one coffee a day could save an investor £129. The average dividend yield of the FTSE 100 is 3.1%. On the face of it, making £4 a year from this doesn’t seem too attractive. Yet this ignores the power of regular investing and the impact of compounding over time.

For example, let’s say the investor puts away £129 each month. When a dividend is received, the money is used to buy more dividend stocks. Instead of simply buying an index tracker that pays out the income, an active approach is used. Given the range of yields on offer in the stock market, it’s plausible to have an average yield of around 7% without taking on a crazy amount of risk.

Let’s say this strategy was kept up for a decade. In theory, the pot could be worth £22,587 at the end of this period. In the following year, it could generate £1,683 from dividends alone. This would equate to £140.25 a month. Ironically, this could mean the investor could get a coffee each day, paid for solely by the income!

A stock with a bright outlook

One stock that could be considered for this portfolio is ZIGUP (LSE:ZIG). The share price is down 3% over the past year, with a current dividend yield of 7.61%.

The business positions itself as an integrated mobility solutions provider. In plain English this means it’s involved in the rental and leasing of light commercial vehicles, along with fleet management and maintenance. In terms of scale, it has over 130,000 vehicles owned or leased, with over a million managed vehicles across the UK, Ireland and Spain.

Back in July when the board announced another dividend, the cover ratio was 2.2x. This means the latest earnings per share cover the dividend by more than twice. This is an excellent sign to me that the dividend is sustainable going forward.

Further, the company is benefitting from key shifts in the market, including increased demand for fleet rentals, a continued transition to electric vehicles, and greater outsourcing of management. All of this should help to keep revenue boosted over the coming years, aiding the dividend.

One risk is that the business is exposed to declines in used-vehicle prices and general vehicle ageing. Earnings may suffer if it has to buffer for added depreciation. Just like any stock that pays a dividend, investors need to remember that such payouts aren’t guaranteed. Therefore, forecasts of future income need to be treated with care.

On balance, I think it’s a company investors can consider as part of the broader plan to try and grow a passive income portfolio.

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Let’s run some simple maths. Suppose a diligent investor builds a portfolio of dividend stocks with an 8% average yield. Over 10 years, by reinvesting the dividends, that £5,000 could grow to over £12,500. By then, it would pay roughly £1,000 a year in dividends, if the yield held.

Extend that to 20 years, and it could balloon to over £27,600, yielding about £2,200 in annual payments. And doubling the investment would roughly double the dividend stream.

But hitting those yields isn’t easy. Many income portfolios today deliver between 6% and 7%. Trying for 8% regularly means veering into riskier territory — companies whose yields aren’t all sustainable. 

However, it’s not impossible. Here’s how I’d screen the situation.

Picking dividends

I like to focus on metrics such as dividend cash ratio (DCR), continuous dividend history and payout ratio. A company that’s paid dividends for over 10 years with a payout ratio under 100% and a DCR of 2, suggests it has enough profit and cash to cover future distributions.

In a thought experiment, I screen FTSE stocks and find 10 that fit the script:

Their yields average about 7.75%. Pretty close to 8% with strict constraints. Loosen one or two filters and higher-yielding names could pop up. But a closer analysis of each stock’s critical.

Digging deeper

If a company’s in debt, that’s a risk to dividends. So the first thing to check is the balance sheet. Using ZIGUP as an example, its debt-to-equity is about 0.82, with a quick ratio of 0.95. Since they’re both below 1, that’s adequately covered.

In its latest results, it generated net income of £79.84m from £1.81bn of revenue – a net margin of 4.4 %. That’s modest, but sustainable for now.

It holds £458.59m in cash and equivalents, but free cash flow’s negative – a red flag. Still, since dividend coverage is sufficient, I’d say it’s still a stock worth considering for an income portfolio.

That said, negative free cash flow is a serious risk. If that persists, the company might struggle to maintain dividends. So far, payouts look ok but it’s something I’d keep a close eye on.

Other risks include cyclicality in the mobility sector and dependence on fleet spending and vehicle demand. If costs rise or demand weakens, revenues and margins may slip. With tight cash flow, a surprise revenue drop could force a dividend cut.

Final thoughts 

An average yield target of 8% is aggressive. So any income-seeking strategy built around it should be only part of a larger diversified portfolio. But the example shows what’s theoretically possible, and the steps to vet dividend names more safely.

It’s wise to follow trends in familiar sectors, stick to companies you understand and maintain diversification across industries and regions.

These screening steps are just a starting point. For keen investors, the London Stock Exchange holds many more promising opportunities for those ready to put in the work.

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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.

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Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

But as history shows, yields that look too good to be true often are. Dividends can be cut when profits fall, and some businesses struggle to sustain generous payouts over the long term.

That is why I always look deeper than the headline number. A company’s balance sheet strength is vital, as is its ability to generate consistent earnings. Equally important is the demand for its products and services. Without a healthy customer base and reliable cash flow, even the fattest dividend yield can prove short-lived.

With that in mind, two shares stand out this autumn as potential ISA candidates for investors seeking income to look at.

Investec

Investec (LSE: INVP) is a FTSE 250 specialist banking group and wealth manager with a £4.33bn market-cap. It has significant operations in both South Africa and the UK, and its size suggests it could soon re-enter the FTSE 100, having been demoted back in 2011.

The share price has climbed an impressive 277.8% over the past five years, showing that growth investors have been well rewarded. 

Meanwhile, income seekers may like the dividend, which currently sits just under 7%. The payout ratio of 49.7% suggests dividends are well covered, while the company has enjoyed five consecutive years of dividend growth. In fact, since 2010, dividends have grown at a compound annual rate of 5.6%.

One concern here is the debt-to-equity ratio of 1.4, which looks on the high side — though that’s not unusual for a bank. A more pressing risk is falling interest rates, which could dent profitability if lending margins shrink. 

Still, with steady growth and strong capital generation, I think Investec looks like a reliable income option this autumn.

Zigup

Commercial vehicle rental firm Zigup (LSE: ZIG) might not have the glamour of a global bank but its dividend yield is even juicier, at 8.5%. The company also provides accident management and repair services, operating across the UK, Ireland and Spain.

The balance sheet looks sturdy, with sufficient debt coverage and management has built a strong dividend track record. Investors have enjoyed 14 straight years of payments and five years of consecutive growth. Since 2015, dividends have grown at a compound annual rate of 6.2%. Between 2024 and 2025, underlying revenue rose 2.3%, leading to a matching increase in dividends.

On the downside, Zigup is a costly business to run. Return on equity (ROE) is just 7.5%, reflecting its thin margins. Free cash flow is currently negative, which is never ideal, and there are always logistical risks in managing a fleet of vehicles across multiple territories. If earnings slip, debt could quickly become a headache.

Long-term potential

Dividend yields above 7% always deserve a second look but caution is key. Investec and Zigup both offer tempting payouts and solid dividend histories, making them attractive candidates to consider for an ISA this autumn. 

While each carries its own risks, I think the long-term income potential looks strong enough for investors willing to ride out the occasional bump in the road to consider it.

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That’s why I’m looking for undervalued high-yield stocks that could beef up a portfolio’s passive income potential while simultaneously offering capital growth opportunities.

These companies are strong candidates worth considering.

Investec

First, there’s FTSE 250 specialist banking group and wealth manager Investec (LSE:INVP), which has a significant presence in South Africa and the UK.

The Investec share price has skyrocketed 235% over five years, and the stock also offers a chunky 7.1% yield on top. Despite those gains, the valuation’s still appealing. The stock’s price-to-book (P/B) ratio is under 0.6.

Beyond the yield, dividend sustainability’s another crucial consideration for passive income investors. On this front, Investec shares shine. The dividend’s well-covered by 2.2 times forecast earnings, providing a wide margin of safety.

Business for the lender is ticking along nicely. Investec expects pre-provision adjusted operating profit to fall between £1.01bn and £1.08bn in its FY25 results due to be published on 22 May. That would be comfortably ahead of last year’s £963.6m figure.

However, falling interest rates could hurt the group if its loans become less profitable. That’s a risk to bear in mind, but I still think the overall investment case looks robust.

WPP

FTSE 100 advertising and communications giant WPP (LSE:WPP) is another stock that delivers a healthy passive income stream. It currently yields 6.6%.

Unlike Investec, WPP’s showing some obvious signs of weakness. In FY24, net revenue and underlying operating profit both went into reverse gear, falling by 1% and 2.5% respectively. The trend has continued in the first quarter of this year, amid a slump in advertising demand. This is an ongoing worry for investors.

But, at 593p today, WPP shares could be a potential bargain to consider. The stock’s rarely traded below 600p since the 2008 financial crisis. Furthermore, with a forward price-to-earnings (P/E) ratio around 6.6, the valuation appears attractive today.

Artificial intelligence (AI) could bring significant growth opportunities to the communications industry. WPP’s ploughing cash into the technology to stay ahead of the game. As one of the largest players in the sector, the company’s well-positioned to establish a competitive advantage in AI if it makes the right investments.

ZIGUP

Finally, FTSE 250 mobility solutions business ZIGUP (LSE:ZIG) may also have plenty to offer dividend investors thanks to a whopping 7.8% yield.

From commercial vehicle rentals to repairs and maintenance, ZIGUP’s services cover the full automotive lifecycle. The firm’s interim results were a mixed bag. Revenue improved 5.6%, but pre-tax profit took a big hit, declining 17.2%, dragged down by lower van prices.

Nonetheless, a forward P/E multiple around 6.5 suggests this could be another value investment opportunity to chew over. An expanding fleet — now 132,500 vehicles strong — bodes well for future growth. The 6% dividend hike to 8.8p per share will also be welcomed by passive income seekers.

Granted, net debt of £782.5m looks high compared to the company’s £756.6m market cap. Balance sheet weakness is a risk to contend with, but there’s a lot to like about this dividend stock too.

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Getting the ducks in line

Before we get to the figures, the most crucial element is getting the strategy right. After all, it’s pointless to be putting more and more money into something that isn’t fundamentally working.

From my experience, an investor would be best placed to regularly put some money aside for income stocks. Of course, a large lump sum injection is never a bad thing. But in reality, personal cash flow needs often mean it’s easier to invest a smaller amount on a monthly basis.

The advantage of this method is that it allows an investor to take advantage of opportunities as they arise. One month, a stock might bump up the dividend per share, making it attractive to consider buying. Another month, a positive trading update might put a company on track for higher-than-expected earnings. Again, this could make it a good option to add to the portfolio.

Over a couple of years, this should allow the person to have a broad portfolio of stocks with varying yields. As a result, if one company has a problem and cuts the dividend, it shouldn’t have a material impact overall that would throw off the progress for the end goal.

Generous yield and dividend cover

If an investor is already in the process of building a portfolio, an opportunistic stock to consider buying could be ZIGUP (LSE:ZIG). The share price is down 16% over the last year, with a current dividend yield of 8.53%.

The lower stock price makes it a potentially attractive option, especially when I consider the reasons behind the fall. Part of it has come from the drop in reported underlying profit before tax for the half-year ended October. It fell by 17.2% versus the same period last year. Yet some of this was due to lower profit made from the disposal of assets, which was unusually high last year. So this doesn’t really relate to normal business operations.

Further, the business is still profitable, with a dividend cover of 2.9. This means that current earnings can cover the dividend several times over. Therefore, I see this as a sustainable income share to consider going forward.

Looking forward, the report mentioned that “we have seen a good supply of new vehicles coming through since the year-end, reducing the fleet age and strengthening our asset base.” This should help to retain existing clients. The main risk I see is if profitability keeps moving lower due to higher costs of adding new vehicles.

The numbers

Let’s say an investor can put £500 a month towards buying dividend stocks with an average yield of 8%. After 14 years, the pot size could be at £155,538. This means that in the following year, it could pay out £1,036 a month, even without adding in any fresh cash.

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Assura (LSE:AGR) is one, with a 7.9% forecast dividend yield. It’s a real estate investment trust (REIT) with a portfolio of leased-out heathcare properties.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Price fall halted?

The Assura share price slide of the past five years is painful. But on Monday (17 February), the stock gained 9% in a single day on news of a takeover approach.

US private equity firm Kohlberg Kravis Roberts made overtures regarding a possible cash offer at 48p per share. That’s 23% above the closing price on 14 February.

The board says the offer would “materially undervalue” the company and has rejected it.

Long-term value

Buying a dividend-paying stock only to have it bought out underneath us for cash means we’d be looking for something else to buy pretty quick. But at least we might have more cash to invest if we make a quick profit.

I wouldn’t consider it for that though, as these things have a habit of disappointing. If no deal comes off, I’d expect the share price to fall back. And we could be back to worrying about that long-term price fall again. Any kind of commercial real estate surely still faces uncertainties too.

But this tells me I’m not the only one who thinks a lot of our FTSE 250 REITs like Assura are worth considering now. At least one big US investor appears to agree.

Time for change

Zigup (LSE: ZIG) might not be a name that gets investors’ heads nodding in recognition. But it’s really just the old Redde Northgate which changed its name last year.

The new name for the vehicle rental and fleet management firm is apparently “allied to a refreshed strategic framework under the new pillars of Enable, Deliver and Grow“. I don’t really know what that means. But I do like Zigup’s 8.3% forecast dividend yield.

I’m less impressed by the 16% fall in underlying first-half earnings per share (EPS) the company posted in December. But it did say at the time that its “outlook is unchanged and remains in line with market expectations“.

Covered dividends

Those expectations include a full-year EPS fall, but a return to earnings growth in 2026. We’d be looking at a price-to-earnings ratio of eight for the 2025 year, dropping to seven on 2027 forecasts. And there’s a solid Buy consensus.

Analysts expect further dividend rises, well covered by earnings. The dividend has been growing over the long term, with just a few minor dips. Together, they make me think Zigup has to be worth considering for those wanting to build up a passive income pot.

We’re still in a tough market here with plenty of competition. And a shaky economy could put pressure on business rentals. But I think the signs look good.

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Here’s why I feel that buying dividend stocks as an alternative second income source is soon going to become very popular.

Moving lower

In the November policy meeting, the committee at the BoE decided to reduce interest rates again, down to 4.75%. Based on current market expectations, three more cuts are expected next year. This would bring the base rate down to 4%. Of course, this isn’t guaranteed. But the direction of travel for interest rates is definitely lower.

This means the income an investor can earn from simply leaving money at the bank should fall as well. Given that the banks take a profit margin too, if the base rate is 4% the actual interest rate to a client is probably 3.5%.

I refer to it as a once-in-a-decade opportunity to flip to another passive income source because this is the usual timeframe of an interest rate cycle. If an investor can shortly move away from excess savings earning interest before the rates drop more, it could be a smart move. It could be another decade before we see interest rates rising again back to the current level.

Snapping up options

The other side of the opportunity is buying dividend stocks. This too could be time sensitive. Typically, when interest rates fall, the economy’s performance improves. This in turn helps to fuel a stock market rally. Dividend yields can fall in this scenario, as the calculation factors in the dividend per share relative to the share price. So if the share price rises but the dividend stays the same, the overall yield will fall.

Therefore, an investor might want to consider buying top dividend stocks while the yields are still attractive. One example to research might be Zigup (LSE:ZIG). The vehicle rental and fleet management firm has a current dividend yield of 6.88%. Over the past year, the stock’s up 3%.

The financial year for the company runs from April to April, so the results released in late July include a portion of 2024. It showed a 23% increase in revenue, with underlying profit before tax up 8.9% from the previous year. The dividend per share was also bumped 7.5% higher.

Zigup has paid out dividends consecutively for the past decade. I think it’s sustainable enough to continue in the future. There’s constant demand in the sector from both commercial and private clients. Further, there’s large potential for growth in Europe outside of current Spanish operations.

One risk with Zigup is that is needs to pay attention for almost constant de-aging of the fleets, as older vehicles need to be swapped out. This represents high capital expenditure.

Pivoting from one to the other

By swapping out funds in savings accounts that will likely be getting lower income and buying dividend stocks like Zigup with good yields, I feel investors may be interested in the opportunity in coming months.

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[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Associated British Foods

What it does: Diversified food, ingredients and retail group known for famous brands like Jordan, Twinings and Primark.

By Mark David Hartley. Associated British Foods (LSE: ABF) is a food and ingredients group and the world’s second-largest producer of sugar and baker’s yeast. It’s also the owner of the retail clothing brand Primark, which has been doing well lately. As an international firm, it risks losses from exchange rate fluctuations and regulations related to food safety, labour standards, and environmental protection. It’s also in a tough industry, with competitors like Premier Foods, Tate & Lyle, and H&M vying for their share of the market.

I think it’s a good value stock because it has low debt, a clean balance sheet, and a reliable dividend with a 2.5% yield. The price grew 88% in the past two years – recovering all pandemic-era losses – yet it’s still undervalued by 17% based on future cash flow estimates. In the next three years, earnings per share (EPS) and revenue are expected to grow by 25% and 10% respectively.

Mark David Hartley does not own shares in any of the companies listed.

Central Asia Metals

What it does: Central Asia Metals operates Kazakhstan’s Kounrad copper mine and the Sasa lead-zinc asset in North Macedonia.

By Royston Wild. Copper prices have fallen sharply in the second half of 2024 as demand worries have intensified. This downtrend could continue if core economic data from the US and China continues to underwhelm.

This has obvious risks for copper producer Central Asia Metals (LSE:CAML). The business produces the red metal in Kazakhstan, alongside other base metals in North Macedonia.

Yet I still find the value this AIM stock offers hard to ignore. It trades on a forward price-to-earnings (P/E) ratio of 9 times. Meanwhile, its price-to-earnings growth (PEG) multiple is 0.3, well below the accepted value watermark of 1.

Central Asia Metals provides a bumper 9.6% dividend yield for this year, too.

As a long-term investor, I’m prepared to accept a little near-term turbulence if the outlook further out is bright. And I think Central Asia Metals’ profits could leap as the energy transition drives copper demand higher.

Analysts at McKinsey & Company forecast global copper consumption to surge 30% between 2023 and 2035. At the same time, supply is set to lag as new projects fail to start up and output from existing assets dips.

Royston Wild does not own shares in Central Asia Metals.

JD Sports Fashion

What it does: JD Sports Fashion is a global retailer of sports fashion brands. 

By Paul Summers: There’s not a lot of love for retailer JD Sports Fashion (LSE: JD.) among investors right now. The stock has seriously lagged the FTSE 100 index in 2024 so far.

Not that this comes as a complete surprise. A cost-of-living crisis was never going to be great news for consumer cyclical stocks. The fact that one of the company’s major brands – Nike – is struggling only worsens things.

However, adjusted profit of £405.6m for the six months to 3 August beat market expectations. With the all-important festive shopping season on the way, the second half of JD’s financial year might prove equally reassuring.

Sure, a rebound in inflation could bring out the sellers again. But the valuation of just 10 times FY25 earnings (as I type) looks too low to me considering JD’s multi-brand, multi-channel offering and rapid overseas growth.

Paul Summers has no position in JD Sports Fashion or Nike.

NWF Group

What it does: NWF is a distributor of fuel, food and animal feeds primarily in rural parts of Britain.

By Christopher Ruane. Shares in NWF Group (LSE: NWF) have fallen by 45% since last Summer and it now trades on a price-to-earnings ratio of 8.

But the company’s most recent trading statement affirmed that the current financial year has started in line with management expectations.

One reason for the decline is weakening business performance. Last year saw revenues fall 10% and pre-tax profit by 35%. Weak demand in the fuel market is an ongoing risk to the company’s performance.

But I think the share price fall looks overdone. NWF has a sizeable customer base and limited competition in some areas. Although profit margins are thin, it remains profitable and last year continued its recent pattern of annual dividend increases.

The yield of 5.5% is attractive in my view. I expect medium-term growth prospects could be limited, but like both the income prospects and what I see as a cheap valuation.

Christopher Ruane owns shares in NWF Group.

Zigup

What it does: Zigup operates van hire businesses in the UK and Spain. The group also provides accident repair and claims management services.

By Roland Head. When supply chain problems made it hard to buy new vans in 2022 and 2023, Zigup (LSE: ZIG) profited from soaring used van prices.

The group’s hire fleet feeds into its used van business, supporting bumper profits on sales of ex-rental vans. However, the shares have drifted lower this year as management have warned of a “normalisation” of used vehicle prices.

The risk here is that the normalisation may turn into a slump. I can’t ignore the possibility.

However, Zigup’s Northgate van hire business is a market leader and has been around a long time. I suspect they’ll manage this transition successfully.

In the meantime, the shares trade on a modest rating of seven times 2024/5 forecast earnings. Zigup also offers a useful 7% dividend yield, well covered by earnings.

I think the balance of risk and reward looks favourable. Zigup is on my radar as a possible value buy.

Roland Head does not own share in Zigup.

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