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2 dividend stocks I’d buy before it’s too late

Martin Pettitt. Licence: https://creativecommons.org/licenses/by/2.0/

Given that inflation is expected to reach 3% in 2017, buying shares with high yields could be a sound move. Clearly, the FTSE 100’s yield of around 3.6% may not be enough to offer a real-terms income return. So finding shares with significantly higher yields may be necessary. Given the index is trading near to its record high, this may not seem possible. However, here are two shares with exceptionally high yields which could be worth buying right now.

A struggling retailer?

Debenhams (LSE: DEB) is expected to record a fall in its bottom line of 14% this year and 9% the year after. Higher inflation could mean that consumers trade down to lower-cost options as they seek to adapt to what may be a new era of negative real wage growth. This means that mid-price point retailers such as Debenhams may see their sales fall, or else be forced to cut prices in order to maintain customer interest.

Due to this, the company’s dividend is unlikely to rise over the next couple of years. However, even factoring-in the forecast fall in profitability, its dividend is set to be covered 1.8 times by profit in the 2018 financial year. This suggests that shareholder payouts will be maintained, meaning Debenhams could continue to yield 6.4% over the medium term.

Although a share price fall cannot be ruled out, Debenhams trades on a price-to-earnings (P/E) ratio of just 8.6. That’s after the forecast fall in earnings and indicates that it offers a wide margin of safety. As such, even if the macroeconomic outlook deteriorates, the company’s shares may not fall significantly. And in the meantime it offers a stunning yield.

Property investment

Real estate investment trust (REIT) Redefine International (LSE: RDI) may be seen as a relatively risky buy at the present time. After all, it is focused on UK property, which could experience a difficult period thanks to Brexit. While in previous years, a growing economy, improving consumer confidence and foreign investment have caused the UK property sector to perform relatively well, that could all change.

Despite this, investing in Redefine could be a sound move. It has a price-to-book (P/B) ratio of 0.9, which indicates there is a wide margin of safety on offer. As such, even if its profitability comes under pressure, its shares may not fall significantly. It also yields 8.2%, which is among the highest yields in the FTSE 350.

Certainly, dividends are covered just 1.1 times by profit. But, with profit due to rise by 24% this year and by a further 5% next year, Redefine’s outlook may be more positive than that which is currently being priced-in by the market. Given inflation is set to reach 3% this year, the company could be one of the very few opportunities for investors to earn a real-terms yield of over 5% this year. Therefore, now could be the perfect time to buy it.

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Peter Stephens owns shares of Debenhams. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.