2 overlooked dividend stocks to help you achieve financial independence

Why these dividend stocks could deliver a market-beating income.

| 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.

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.

Identifying dividend stocks with above-average growth potential can lead to surprisingly large gains. As a general rule, dividend growth will often provide support for share price growth, as long as the dividend remains affordable and supported by earnings.

+223% in five years

FTSE 100 publishing and information group Relx (LSE: RELX) is a rare beast — a print publisher that’s successfully made the switch to the internet. Known as Reed Elsevier until 2015, Relx publishes a large number of academic journals. It also fulfils a similar function in the legal sector and provides a range of information-based analytics tools.

Most of the firm’s products are high-margin subscription services, which customers cannot afford to be without. This stickiness has given the company tremendous pricing power over the years.

This power becomes obvious when you look at the group’s financial results. Revenue has only grown by an average of 3.2% since 2012, but adjusted operating profit has risen by an average of 5.4% per year. This suggests that Relx is continually able to increase its profit margins through a mixture of price hikes and cost-cutting.

Low costs and upfront subscription payments from customers mean that on average, 95% of the group’s profits are converted into cash flow each year. That’s a strong performance and has allowed the company to increase its dividend per share by an average of 10% per year since 2012.

Is Relx a buy?

The firm’s share price has risen by 223% over the last five years. As you’d expect, this stock isn’t cheap. However, the forecast P/E of 20 and 2.5% yield isn’t necessarily too high to consider buying. If the company can continue to increase its profits at the rate we’ve seen in recent years, then I believe further gains could be possible.

A tempting 5% yield

You may not be familiar with Chesnara (LSE: CSN), but it belongs to a class of company that’s performed well for investors in recent years. It specialises in managing closed books of life insurance business. It buys portfolios of insurance policies from other insurance firms and manages them until they’ve all expired.

In addition to this, some of the group’s European subsidiaries write new insurance business, potentially providing a long-term growth opportunity.

The group’s management seem to have done a good job of expanding while generating plenty of surplus cash for shareholders. The dividend has grown from 11.85p per share in 2005 to 19.5p per share today. Although that’s only an average increase of 4.2% per year, I think it’s pretty impressive given that dividend growth continued throughout the financial crisis.

Broker forecasts for 2017 earnings have risen by 22% since January, driving the shares higher. But the stock still only trades on a forecast P/E of 13 and offers a forecast yield of 5.2%. Also, this positive earnings momentum could bode well for 2018.

In my view, Chesnara could be a strong income buy. I’m definitely tempted to take a closer look.

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.

Roland Head 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.

More on Investing Articles

Investing Articles

How many National Grid shares must I buy for a £100 monthly second income?

I think National Grid could be one of the safest options for investors seeking a dividend income. And today its…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

NIO stock is down 90%. Will it recover?

NIO stock has fallen significantly from its 2021 all-time high. But could now be a chance for this Fool to…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 UK shares could help me reach £1,000,000 in my Stocks and Shares ISA

A FTSE 100 compounding machine and a FTSE 250 value stock are the UK shares Stephen Wright thinks could help…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

If I’d invested £1,000 in Lloyds shares at the start of the year, here’s what I’d have now

The stock market is unmoved, but Stephen Wright thinks last year’s record profits might give Lloyds shares a long-term boost.

Read more »

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

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »