Forget the Royal Mail share price, I’d go for this 8% FTSE 250 dividend instead

first_img Rupert Hargreaves | Saturday, 4th January, 2020 | More on: PAY RMG Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of PayPoint. 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. Firstly, the group’s balance sheet is much stronger. At the end of its 2019 financial year, PayPoint reported a net cash balance of £38m on its balance sheet, compared to Royal Mail’s net debt position of £320m. Secondly, there is its cash generation. For fiscal 2019, the company generated £50m of free cash flow from operations, roughly covering its dividend to investors. To put it another way, after spending £11m on capital projects, the firm returned all excess cash to investors. High qualityAnother reason why I like PayPoint over Royal Mail is the fact that the company is what I like to call a high-quality business.Over the past six years, the group has produced an average return on invested capital (a measure of profit for every £1 invested in the business) of 64%, compared to the market median of just 4%!This number tells me that PayPoint is a highly profitable enterprise. As the company provides the vital service of payments processing for tens of thousands of businesses and customers around the world, I reckon this should continue for many years to come.That’s why I’d buy this 8.3% yielder over Royal Mail any day.  Simply click below to discover how you can take advantage of this. I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Our 6 ‘Best Buys Now’ Shares At first glance, the Royal Mail (LSE: RMG) share price looks like an excellent income investment. At the time of writing, the stock offers a prospective dividend yield of 6.4%, compared to the broader market average of 3.5%. However, when you dig into the company’s prospects and cash flows, it looks as if this distribution is on shaky ground. 5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…Falling earningsSince 2016, Royal Mail’s net income has halved, falling from £325m in 2015 to £175m for 2019. City analysts are expecting this trend to continue for the next two years. Analysts have pencilled in a 55% decline in earnings for 2020 and 31% for 2021. Based on these projections, Royal Mail’s dividend cover looks set to fall from 1.4 times in its current fiscal year to under one by 2021. A dividend cover ratio of less than one implies that the company will not be earning enough money from its operations to cover the dividend. That’s a big red flag.If Royal Mail does not have enough cash coming in from operations to meet its projected dividend, then the company will either have to sell assets or borrow money to meet the payout. The next option is a dividend cut. That’s why I think investors would be better off avoiding the Royal Mail share price for the time being. Cash cow Instead of Royal Mail, I’d buy FTSE 250 income champion PayPoint (LSE: PAY). This year, PayPoint is expected to distribute 84p per share to investors in dividends, giving a yield of 8.3% on the current share price. Its dividend is also uncovered by earnings per share, but there are two reasons why I believe this distribution is more secure than that of Royal Mail.  Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. Forget the Royal Mail share price, I’d go for this 8% FTSE 250 dividend instead “This Stock Could Be Like Buying Amazon in 1997” I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! Enter Your Email Address See all posts by Rupert Hargreaves Image source: Getty Images last_img read more