2 shares on my watchlist yielding more than 5%

These stocks look to be future income champions.

| 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.

The market’s best investments are usually hidden from plain sight and away from the crowd. Because they are difficult to find, these stocks often trade at deeply discounted valuations, giving investors who are willing to put in the extra effort an excellent opportunity to profit.

I believe Anglo Pacific Group (LSE: APF) is one such company. Anglo Pacific is a resource royalties company, which means it’s not as exposed to commodity prices as traditional miners. It has revenue-based royalty deals limiting direct exposure to operating and capital costs of the underlying mine operations. The beauty of this business model is that it’s hugely cash generative and there’s very little capital required to generate returns.

Cash cow

In 2016 the company received £19.7m in royalty income from investments and free cash flow for the period was £13.2m.

The majority of this income is returned to shareholders with a minimum annual payment of 6p per share. Management has committed the company to pay 65% of earnings out to shareholders, and at current revenue run rates, the 6p per share payout will have to be revised upwards this year.

However, it doesn’t look as if the market understands the full dividend potential here. Management is looking to pay 65% of earnings per share to shareholders via dividends, but City analysts have only pencilled-in a dividend payout of 7p per share for 2017 on earnings per share of 15.6p. A payout ratio of 65% is equal to a dividend of 10.1p per share giving a yield of around 8.7% at current prices. Of course, management may decide to adopt a more conservative dividend policy if earnings come in below expectations, but right now, it looks as if Anglo Pacific is an extremely undervalued dividend play.

Income and capital

I believe Palace Capital (LSE: PCA) is another hidden dividend champion. The company is a commercial property investment firm with a portfolio worth £185m and a net asset value per share of 419p. At the time of writing, shares in the firm are trading at a near 15% discount to NAV and it is here, as well as the company’s 4.5% dividend yield, where I believe the value lies.

City analysts believe the company is set to hike its dividend payout by more than 10% for the year ending 31 March to 18p per share, which would give a dividend yield of 5.1%, an extremely attractive yield for a solid property investment.

At the same time, investors will be able to take advantage of Palace’s discount to NAV. By buying the shares at a 15% discount to the last recorded net asset value, there is a near 18% upside available in addition to the yield of 5.1%. If the company manages to increase its NAV during the period, the return could even be even higher.

So, if you’re looking for a stock that can provide both income and capital growth with reduced risk, Palace Capital might just be the one.

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Anglo Pacific. 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

Young black female footballer training on stadium pitch
Investing Articles

My JD Sports Fashion share price prediction for the second half of 2024

The JD Sports Fashion share price hasn't yet recovered from January’s slump. So will the retailer's stock bounce back in…

Read more »

Investing Articles

Up 47% in a week! Can the Capita share price continue to rocket?

The Capita share price has smashed the market in the last week, and Harvey Jones wonders whether it has the…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

What could the second half of 2024 have in store for the BAE Systems share price?

After a strong first six months of the year, what could be coming next for the BAE Systems share price?…

Read more »

Growth Shares

2 FTSE 100 stocks that are outperforming these MAG7 members

Jon Smith reveals some FTSE 100 stocks that offer him a viable alternative to the Magnificent 7, based on recent…

Read more »

Investing Articles

My Scottish Mortgage shares just paid me £14.88. It’s another step towards making a million

Harvey Jones has just received a measly dividend from his Scottish Mortgage shares, but he's got big, big plans for…

Read more »

Investing Articles

FTSE 100 shares: is Barclays a standout buy?

Barclays shares are among the FTSE 100's top performers and this Fool thinks they have further to go. He explains…

Read more »

Black woman using loudspeaker to be heard
Investing For Beginners

At 52-week highs, here’s what may be next for the Lloyds share price

Jon Smith notes the strong rally in the Lloyds share price in the recent past and explains why the good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

These UK shares are stinking out my ISA. Time to sell?

Paul Summers has been reviewing some of the worst-performing UK shares in his portfolio. Has the time finally come to…

Read more »