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2 ‘hidden’ income stocks with monster dividends

Image: Galliford Try: Fair use

During the summer of 2016 the construction and housebuilding sector was left reeling from the aftermath of the EU referendum, with firms such as Galliford Try (LSE: GFRD) hit by a huge sell-off following the shock Brexit result.

Back in August I recommended Galliford Try as a long-term recovery play, with the added bonus of a meaty 10% dividend yield. But was I right to be contrarian?

102% gain

It certainly seems so, with shares in the Uxbridge-based group soaring by a massive 102%, up from multi-year lows of 785p last summer. But now I face the conundrum of whether the company still offers good value for shareholders, and whether or not I should continue to recommend its shares to new investors.

The FTSE 250-listed group recently updated the market with its interim results for the first six months of its financial year with a very confident outlook. The group put in a strong first half performance, with pre-tax profits up 19% to £63m, and group revenue climbing to £1.31bn, compared with £1.27bn for the same period a year earlier. The interim dividend was hiked 23% to 32p per share reflecting confidence in the full year outlook.

Positive outlook

I believe the outlook remains very positive, particularly for the Linden Homes and Partnerships & Regeneration businesses within the group, given the government’s commitment to increasing housing supply. The housing market continues to enjoy good mortgage availability, along with low interest rates and the stimulus of the ‘Help to Buy’ scheme. Analysts are forecasting continued growth for the group over the medium term, with a 13% rise in earnings anticipated for the current year to June, with another 13% improvement expected for fiscal 2018.

Despite the strong share price rally over the last few months, the shares are still trading on a very attractive valuation of 10.4 times earnings for the current year, falling to just 9.2 for FY 2018. Shareholders payouts look set to continue to rise in line with the company’s progressive dividend policy and will yield a monster 6.2% at today’s levels.

Compensation

Another UK housebuilder that became a casualty of the post-Brexit panic last summer was, of course, Bovis Homes (LSE: BVS). Since then, however, the Kent-based group hasn’t enjoyed the same level of success as its FTSE 250 peer Galliford Try. The mid-cap firm last month reported a 3% dip in pre-tax profits, as it was forced to pay compensation to customers as a result of poorly-built homes.

The company has since put in place a customer service task force to address the issues, with a customer care provision of £7m to cover the cost of any remedial work and to pay appropriate compensation to affected customers.

The valuation remains attractive at less than 10 times forecast earnings for 2017, with the shares supported by a tempting dividend yield of 5.4%. But my preference at the moment would be Galliford Try, as Bovis’s recent issues may yet have an impact on its reputation and sales.

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Bilaal Mohamed has no position in any shares mentioned. 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.