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

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

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

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 assessed. 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.

More on Investing Articles

Tesla car at super charger station
US Stock

£1k invested in Tesla stock at the start of the year is currently worth…

Jon Smith reveals the performance of Tesla stock in 2025 and explains why he doesn't believe the move lower is…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

What sort of return could someone get by investing £20,000 in UK dividend shares?

Should UK savers consider dividend shares over cash? Stephen Wright thinks those looking for long-term passive income would be wise…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Around a 15-year high, is Barclays’ share price still too cheap to ignore?

Barclays’ share price is at a level not seen since 2010, but price and value aren't the same thing, so…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

47% below fair value and with an 18% earnings growth forecast, should investors consider this FTSE retail institution now?

This FTSE 100 British retail institution lost its way for a while but has bounced back in recent years, and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Lloyds share price: up 40% this year, is it time to take profits?

The booming Lloyds share price is up nearly 40% in 2025, outperforming its UK banking peers. Our writer asks whether…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

If the stock market crashes tomorrow, here’s what I’ll do with my portfolio

A stock market crash can feel terrifying. Here’s why staying calm matters – and how this recovering FTSE 100 company…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Prediction: in 12 months the smashed up Diageo share price could transform £10,000 into…

Harvey Jones has taken a big hit on his Diageo shares but forecasts suggest next year may offer something to…

Read more »

Aviva logo on glass meeting room door
Investing Articles

Will the Aviva share price reach £10? Here’s what needs to happen

With profits potentially set to double by the end of 2026, could the Aviva share price do the same and…

Read more »