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These 2 bargain dividend stocks could beat the FTSE 100 in 2017

Image: AstraZeneca. Fair use.

Given that inflation is forecast to rise to 3% or more this year, a ‘bargain’ dividend stock may become an increasingly rare item. After all, investors are likely to seek dividends that are ahead of inflation in order to maintain a ‘real-terms’ income. Therefore, dividend shares may become increasingly expensive due to higher demand. At the present time, though, a number of dividend shares appear to offer excellent value for money. Here are two prime examples.

Improving performance

The recent results from Morrisons (LSE: MRW) show that the company’s new strategy is delivering improved performance. Not only has it resulted in the first year of positive like-for-like sales in around five years, debt levels are also being reduced. This means that the company’s financial strength is improving, which may lead to higher dividends in the long run.

Certainly, the current dividend yield of 2.6% is relatively low. However, Morrisons has scope to rapidly increase this over the medium term. It has a payout ratio of just 50%, which indicates that the dividend could increase by around 50% and still leave the business with sufficient capital to reinvest for future growth. And since the company’s bottom line is forecast to rise by 10% per annum for the next two years, dividends could rise by a similar amount in the near term.

Strategy changes, such as the reintroduction of the Safeway brand, and capital-light opportunities, such as online food delivery, could boost the company’s long-term profit growth yet further. In fact, a price-to-earnings growth (PEG) ratio of 1.9 doesn’t seem to factor in the company’s potential in future years. So now could be the right time to buy Morrisons for its FTSE 100-beating potential.

Defensive opportunity

While AstraZeneca’s (LSE: AZN) financial performance has been poor in recent years, it is expected to finally return to profit growth next year. Its bottom line is forecast to increase by 9% in 2018, which puts it on a relatively enticing PEG ratio of 1.1. Given the company’s defensive characteristics, this seems to be an attractive price to pay at a time when the FTSE 100 is trading close to its all-time high.

In fact, AstraZeneca could be a relatively low risk means of obtaining a high yield over the medium term. Its business model is less positively correlated to the wider economy than is the case for most FTSE 100 stocks, which means that it could offer lower volatility and risk reduction for a portfolio. Its dividend yield of 4.6% is covered 1.3 times by profit, which indicates it is sustainable at current levels. And with earnings growth just around the corner, dividends could begin to creep up after a handful of stagnant years.

Certainly, AstraZeneca’s turnaround plan is not complete. More investment will be required in order to develop a pipeline that can drive profitability higher over a sustained period. However, with a sound balance sheet and strong cash flow, the company has the potential to do so and beat the FTSE 100 in the process.

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Peter Stephens owns shares of AstraZeneca and Morrisons. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.