Two cheap dividend stocks I’d buy in May

These two stocks may offer better investment potential than the market currently realises.

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Finding shares which offer better-than-expected performance is challenging at the best of times. However, now that the UK’s political and economic outlook has been made even more uncertain with a General Election, finding outperforming shares may be more difficult than ever. Despite this, there are stocks which could beat the index and investor expectations. Here are two prime examples.

Improving performance

Reporting on Tuesday was specialist Emerging Markets asset manager, Ashmore (LSE: ASHM). It has made progress in the third quarter, with assets under management increasing by $3.7bn during the period. This was aided by positive investment performance of $2.3bn and net inflows of $1.4bn. Net inflows were primarily driven by an increase in the level of gross subscriptions, through new mandates and incremental allocations from existing clients, as well as a reduction in redemptions.

Looking ahead, Ashmore’s strong investment performance in areas such as Emerging Markets could help to improve its financial outlook. The company is forecast to record a 14% rise in its bottom line in the current year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.2, which indicates that they offer good value for money even while the FTSE 100 is close to a record high.

In terms of its dividend outlook, Ashmore’s 4.8% dividend yield is above the FTSE 100’s yield of around 3.7%. Since its dividends are covered 1.3 times by profit, they appear to be sustainable and could rise at a similar pace to profit growth in the long run. Certainly, asset management companies tend to be relatively cyclical. However, with clear growth potential, Emerging Markets could be a strong sector in future years. Therefore, now seems to be the right time to invest in the company for the long run.

Dividend growth potential

While technology-based service company Nex Group (LSE: NXG) has a dividend yield of just 2.7%, its outlook as an income stock is relatively positive. A key reason for this is the company’s growth potential, with its bottom line due to rise by 6% in the current year, and by a further 14% next year.

Beyond that, more growth is on the cards as the company has a relatively strong position in its areas of operation. Therefore, its competitive advantage may prove to be relatively high in the long run.

Over the course of the next two years, Nex Group is expected to record a rise in its dividend payout of over 20%. This puts it on a forward dividend yield of 3.2% and since dividends are expected to be covered 1.9 times by profit next year, there seems to be scope for further rapid rises in shareholder payouts beyond the 2019 financial year.

With Nex Group trading on a PEG ratio of 1.2, now seems to be an opportune time to buy it. The company appears to have a potent mix of growth, value and income potential for 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. 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.

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