Neil Woodford just bought a dividend stock you’ve probably never heard of

Neil Woodford’s latest dividend pick could be a great addition to a portfolio, says G A Chester.

| 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.

Acclaimed fund manager Neil Woodford’s biggest holdings are blue-chip dividend stocks that will be very familiar to you. AstraZeneca, GlaxoSmithKline, Imperial Brands, British American Tobacco and Legal & General are the top five companies in his flagship equity income fund.

However, the market was notified this week that Woodford has taken a 10.2% stake in a business that many readers have probably never heard of. For one thing, the company was floated barely more than a year ago, and, for another, the market it’s on is AIM.

However, like Woodford, this doesn’t put me off. The company is one of the larger businesses on AIM, has a long history, offers exposure to a niche growth sector and pays a nice dividend.

Family fortunes

Watkin Jones (LSE: WJG) can trace its roots back to a business founded by carpenter Huw Jones in 1791. Current chief executive Mark Watkin Jones is the ninth generation of the family to head the company. It’s now a leading UK developer and constructor of multi-occupancy properties, with a focus on student accommodation.

Descendents of the founding family and related parties sold shares at 100p at flotation, and then more shares at 140p in a recent placing, but still retain a significant stake in the business. Woodford participated in the placing, taking 26.1m shares for an outlay of £36.5m.

Still very buyable

Watkin Jones released maiden annual results as a listed company in January. These were in line with expectations and saw the board deliver on its dividend promise and point to a positive outlook for 2017.

You’ll have to pay a bit more than Woodford paid for his shares — they’re currently trading at 150p — but they still look very buyable to me at this level. Current-year forecasts give an undemanding P/E of 11.2, falling to just 9.9 for 2018, while the prospective dividend yield is 4.2%, rising to 4.4% for next year.

Unfortunate events

While Watkin Jones is a brand new investment for Woodford, FTSE 250 power generator Drax (LSE: DRX) is a long-time holding that he’s been pumping more cash into recently.

Drax has suffered a tough few years. In a particularly unfortunate turn of events, just as the company upgraded the UK’s biggest power station from coal to biomass, the government ended green energy subsidies.

Bright future

Despite its troubles of recent years, the future is looking brighter for Drax. Diversification, including through acquisitions, is expected to drive earnings rapidly higher.

With the shares trading at 328p — lower than Woodford paid when he bought last month — the current-year forecast P/E is 25.2 and the prospective dividend yield is 3%. This may not scream ‘value’ but the anticipated momentum of recovery next year brings the P/E down to a more reasonable 17.4, with the dividend yield rising to an attractive 4.7%. As such, I think now could be a good time to buy a slice of this business.

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.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Why the boohoo share price soared by almost 14% in November

Is troubled online fashion retailer boohoo beginning a turnaround that may cause the share price to rocket through 2025 and…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

Here’s how saving £5.40 a day could net me £1,971 yearly passive income for life

The price of a cup of coffee seems to have broken the £5 mark. Is it time to put that…

Read more »

Investing Articles

2 top FTSE 100 stocks surging to record highs (hint — not Rolls-Royce)!

Ben McPoland takes a closer look at a pair of high-performing FTSE 100 stocks that continue to enrich long-term shareholders.

Read more »

Investing Articles

A cheap FTSE 100 share to consider buying for the next 10 years!

This FTSE 100 share has pride of place in my portfolio. Here's why I think it could be a top…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Down 44% in 2 months! Is this FTSE 250 green energy pioneer priced too cheaply?

After a sharp tumble in recent months, this FTSE 250 company with a growing order book is almost 90% below…

Read more »

Investing Articles

Investing a £20k Stocks and Shares ISA in this high-yielder might give me a £2,000 annual income

Harvey Jones is now wondering whether to pour his entire Stocks and Shares ISA allowance into a single FTSE 100…

Read more »

Investing Articles

Saving £20k in an ISA? Here’s how I’m aiming to turn that into a stunning £2,035 monthly passive income

Harvey Jones is keen to build a high and rising passive income by investing in a balanced spread of top…

Read more »

Investing Articles

How I’ll aim to turn an empty ISA into a £100k nest egg buying cheap shares in 2025

Christopher Ruane explains how he thinks taking a long-term approach to buying cheap shares and holding them could help him…

Read more »