I’d invest my first £500 in this high-dividend-yield FTSE 250 stock today

Investing in high-dividend-yield stocks isn’t the most exciting start to an investment journey. But if I were to restart from scratch with just £500, this is precisely where I’d choose to begin.

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As dull as buying “safe” stocks can be, they provide critical stability to a portfolio. And that can drastically reduce the impact of stock market volatility similar to what was experienced in 2022.

The FTSE 250 index predominantly consists of growth stocks. And yet there are a few high-dividend yielders among its ranks. One in particular is Ibstock (LSE:IBST) which offers an almost 5% dividend yield – nearly double the index’s average.

The importance of sustainability

A 5% dividend yield may not sound like much compared to what other stocks are currently offering. Just looking at homebuilder Persimmon, shareholders are reaping as much as 16%! So why bother with Ibstock?

A common mistake that novice investors make is assuming dividends are guaranteed. They’re not. Dividends are a way for management teams to return excess capital back to shareholders if there’s no better use for it internally.

The key word is “excess”. If cash flows become restricted, the amount of money available to fund dividends quickly diminishes, resulting in a cut, suspension, or even outright cancellation.

The yield is calculated by dividing the dividend per share by the stock price. As such, increasing dividends will increase the yield. However, it can also surge if the stock price suddenly drops. And that’s what’s happened to Persimmon.

With the UK housing market weakening, demand is falling, and investors are expecting earnings and, in turn, dividends to suffer. So, as attractive as a 16% dividend yield seems, it’s likely unsustainable.

That brings us to Ibstock. Despite operating in a similar industry, shareholder payouts may be primed to surge in the coming months and years.

A growing opportunity?

As a quick reminder, Ibstock manufactures construction materials, primarily clay bricks. It’s one of the largest suppliers of the homebuilding industry, and even with construction projects being delayed or slowed, demand for bricks remains strong. Why? It’s simple, the UK has a brick shortage.

The firm’s latest trading update shows that total revenue in 2022 is expected to hit £510m – a 25% year-on-year increase. Meanwhile, underlying earnings are anticipated to exceed previous expectations. And with two new factories on schedule to begin production this year, the firm’s capacity to deliver on customer orders is about to surge.

With homebuilders looking to become less reliant on expensive European exporters, Ibstock should have little trouble finding customers, even in a depressed construction market. And it seems management agrees. Beyond increasing dividend payments, a £30m share buyback programme has been initiated.

Of course, a severe reduction in home construction projects will eventually impact earnings. Depending on how much further property values suffer from rising interest rates, management may be forced to lower prices, harming revenues.

It’s a short-term risk that needs to be considered. However, given the long-term demand for UK housing isn’t changing, this potential downturn will likely only be temporary. And as the firm is set to become the largest supplier of clay bricks in the UK, the current 5% dividend yield may grow substantially in the future.

The post I’d invest my first £500 in this high-dividend-yield FTSE 250 stock today appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Ibstock Plc. 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.