Finding shares that offer a mix of income potential and capital growth prospects is never easy. What makes it more difficult at the present time is the fact that the FTSE 350 has risen by 20% in the last year. Therefore, valuations are higher, margins of safety are narrower and capital gain potential is more limited. Despite this, there are numerous stocks which could be worth buying for the long term. Here are two prime examples.
Reporting on Tuesday was specialist insurer Hiscox (LSE: HSX). The company’s update was rather mixed, with parts of its business performing well and others less so. However, its decision to invest heavily in retail operations seems to be paying off. Hiscox Retail reported a rise in gross written premiums of 29.7%. This was aided by strong performance in the US, Europe and in its Special Risks segment. In the UK and Ireland, Hiscox Retail reported a 13.9% rise in gross written premiums, which was a strong result given difficult operating conditions.
Progress, however, was offset to some degree by the performance of Hiscox’s London Market segment. While disappointing on a relative basis, its increase in gross written premiums was 0.4%. As such, the decision to invest in its Retail operations seems to be paying off, while a disciplined approach to its slower-growth markets should ensure they do not act as a major drag on its future financial and share price performance.
With a dividend yield of 2.5% which is covered 2.3 times by profit, Hiscox appears to be a relatively enticing income stock for the long term. Its bottom line is due to rise by 9% in the next financial year, which makes its price-to-earnings growth (PEG) ratio of 1.7 appear fair. As such, its long-term total returns could be relatively impressive even with the FTSE 350 trading at historically high levels.
Also offering scope for a higher dividend in future years is transaction specialist Paypoint (LSE: PAY). It currently yields 4.7% from a dividend which is covered over 1.3 times by profit. Alongside earnings growth forecasts of 6% in each of the next two financial years, this suggests an inflation-beating rate of dividend growth could be ahead for the business.
Furthermore, Paypoint continues to offer value for money even after its 22% share price gain during the course of the last year. It has a price-to-earnings (P/E) ratio of 15.8, which suggests there may be upward re-rating potential.
One catalyst to do so could be the tailwind the company is set to experience over the medium term. With the payments industry becoming increasingly digital and consumers demanding faster, more secure and easier methods of payment, there are likely to be growth opportunities for Paypoint in future years. As such, now could be the perfect time to buy it ahead of a potentially more profitable period.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of PayPoint. 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.