2 cheap dividend stocks that could help you retire rich

Progressive dividends that grow every year are the stuff of which long-term wealth is made.

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Many dividend investors look for the biggest yields on offer today. That can be a winning strategy, but it can miss the chance to get in on some of tomorrow’s biggest cash cows now.

I’m talking of inflation-beating progressive dividends, which might not offer top yields just yet. If you get in early, you can gear up the effective yield on your initial purchase price over the coming years.

Investment management firm Brooks Macdonald Group (LSE: BRK) looks like one such candidate to me. Although its forecast dividend yield for the year to June 2018 stands at a modest 2.5% on today’s price of 2,000p, that would represent a 125% increase in cash terms in just five years.

If you’d bought shares back then, you’d already be looking at an effective yield this year of 3.8% on your purchase price, and further progressive rises would keep on boosting that.

Five-year record

And you’d have a 50% capital gain over five years too, even after this summer’s share price spike has fallen back — and good dividend stocks are surprisingly good at achieving share price growth too.

In fact, if you’d bought shares at flotation in 2005, you’d now be sitting on a 13-bagger, and this year’s dividend would yield 33% on the flotation price.

A quarterly update Tuesday told us that discretionary funds under management at 30 September had risen 5.1% since 30 June, to £11bn, with the gain consisting of £376m in net new business and £155m in investment performance.

EPS forecasts for this year are actually pretty flat, but that sounds like it might be too pessimistic. On a forward P/E of 18, Brooks Macdonald Group looks like a buy to me.

Little boxes…

…well, boxes of all sizes, with a variety of other packaging products thrown in. That’s the order of business for DS Smith (LSE: SMDS), and it’s been pretty good at it, bringing in years of steady EPS growth — and that all-important progressive dividend too.

From 8p in the year to April 2013, the annual payment is expected to have doubled by the same stage in 2018. The share price, at 497p, has kept in step as earnings have climbed, so the yield has been steady at around the 3.2% to 3.5% level — which is close to the long-term FTSE 100 average.

But what is far from average is that level of dividend growth. Looking at the five-year story again, anyone who bought in late 2012 would be facing an effective dividend yield this year of 7.4% — and a 136% rise in the share price.

They’re cheap

The shares are on forward P/E multiples for this year and next of 14.5 and 13.2 respectively — slightly below the FTSE 100 average, but with a significantly better-than-average track record and long-term expectations.

For a stock with attractive prospects for both growth and dividends, that just looks too cheap to me — and I can’t help wondering if the temporary slip to only single-digit EPS growth predicted for this year is scaring off investors, even though there’s a boost to 10% pencilled in for next year.

Meanwhile, European growth continues, with the company having just snapped up Romania’s EcoPack and EcoPaper for approximately €208m. DS Smith says this will “significantly enhance our capacity to serve customers in this high growth region as well as supporting our wider substantial Eastern European presence.

Perhaps “Europe” is frightening the punters? It shouldn’t.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. 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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