2 ‘secret’ dividend stocks trading at dirt-cheap prices

These two dividend shares could deliver high capital gains in the long run.

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While shares offering high growth prospects may be classed as growth stocks, sometimes they can also have exceptionally high yields. This could be because of a large share price fall, or a dividend which has increased rapidly in recent years.

Either way, companies which have previously been the focus of growth investors could also become appealing to income investors. That’s especially the case since inflation is set to rise to 3% or more this year. With that in mind, here are two stocks with high yields which aren’t necessarily classed as income stocks.

A troubled retailer

The last four years have been hugely disappointing for online retailer N Brown (LSE: BWNG). Its earnings have fallen in each period and the company is forecast to do likewise in the current fiscal year and the next one too. That’s unsurprising, since the outlook for UK retailers is downbeat. Consumer confidence is expected to fall and this could cause sales and/or margins at N Brown to come under pressure.

Despite this, the company has income appeal. It currently yields 7% from a dividend which is covered 1.6 times by profit. This indicates there is scope for dividends to rise in future years, even if profitability falls. And since N Brown is expected to return to bottom-line growth in the 2019 financial year, the scope for a higher dividend may improve.

In addition, N Brown’s shares currently trade on a price-to-earnings (P/E) ratio of just 8.8, which indicates there is upward re- rating potential on offer. In fact, combining its rating with a forecast earnings growth rate of 5% in financial year 2019 means N Brown has a price-to-earnings growth (PEG) ratio of just 1.8. As such, it could prove to be a strong growth and income play over the medium term.

An uncertain outlook

The future for spread betting companies such as CMC Markets (LSE: CMCX) is rather uncertain. Changes to regulations have caused investor sentiment to come under pressure, and the company now trades on a P/E ratio of just 6.6. However, this is likely to rise over the next two years as CMC’s bottom line is forecast to decline by as much as 43% during the next couple of years.

Clearly, this would be hugely disappointing for its investors, but CMC is expected to return to profit growth of 9% in financial year 2019. Furthermore, the fall in its share price of 36% in the last three months means that it now yields 5.3%. And since dividends are due to be covered 1.6 times by profit even after factoring-in its falling profitability, the current level of shareholder payouts seem to be sustainable.

While CMC is a riskier buy than many more popular income shares, its high yield and low valuation indicate there is a wide margin of safety on offer. Therefore, both it and N Brown could prove to be excellent income stocks in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Peter Stephens 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.

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