2 hot income stocks I’d buy yielding up to 6%

These dividend champions should not be overlooked.

| 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.

Shares in pub group Mitchells & Butlers (LSE: MAB) are sliding after the company reported a decline in profits for the financial year ending 30 September 2017 and cut its dividend for the current fiscal period. 

Thanks to rising costs, adjusted operating profit for the year to the end of September fell 3.1% to £314m and adjusted earnings per share declined 1.4%. On the plus side however, revenue growth of 1.8% for the period helped offset some of the declines.  

According to CEO Phil Urban, profits have fallen as “cost headwinds across the industry have adversely affected margins, but we continue to work hard to mitigate as much of these as possible through our focus on efficiency and profitable sales growth.

Unfortunately, due to the company’s efforts to improve efficiency, management has decided to eliminate the group’s interim dividend to investors “pending assessment at year-end of capital allocation and prospects.

For the period just ended, management has recommended a payout of 5p per share, giving a yield of 1.5% at current prices. City analysts had been expected the shares to yield 3% for the fiscal year ending 30 September 2018. 

Waiting for a payout 

Even though today’s dividend announcement is disappointing, I’m still positive on Mitchells’ income outlook. According to prior year figures, the firm only paid out £31m in dividends to investors for 2016, and £12m for 2017. These distributions were easily covered by cash flow from operations. Across both years the company generated a free cash flow of around £159m. 

These numbers suggest to me that management will be able to reinstate the dividend within the next few years. In the meantime, investors can buy the company today at a lowly valuation of only 7.5 times forward earnings — a valuation that looks too cheap to pass up. 

Another dividend champion that’s seeing its shares crumble today after cutting the payout is Empiric Student Property (LSE: ESP). Management had been targeting a dividend payout of 6.1p for 2017, but is now reducing this to 5.6p and then 5p for 2018. Even though this reduction is disappointing, a payout of 5.6p still gives a dividend yield of 6.1% at current prices. 

Long-term defensive income

Once again, this dividend cut looks to be a sensible decision that should help the REIT raise the payout in future. 

Following an operational review, management has concluded that the group has grown too fast and “a number of operational inefficiencies” have “adversely impacted performance.” A review of the operating structure, building sales and cost cuts are expected to put the business back on track, but it will take some time for these changes to hit the bottom line. 

Over the long run, these adjustments should pay off and in the near term, management is still targeting a total annual return of 10% per annum through both income and net asset value growth. 

The last reported net asset value was 105p so at today’s price of 92p, for value investors focused on long-term defensive income from property, Empiric Student could be a great buy.

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 owns no 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

Newspaper and direction sign with investment options
Investing Articles

When cheap markets meet favourable conditions, sentiment flips very quickly

London’s stock market is cheap — some sectors, even cheaper. Given a change in sentiment, the uprating could be substantial.

Read more »

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

7.7% yield and going cheap! Why is this unknown FTSE 250 stock flying?

It's no household name, but there's one FTSE 250 stock with a high dividend yield and booming profits that looks…

Read more »

Photo of a man going through financial problems
Investing Articles

I’d stop staring at the Nvidia share price and buy this FTSE 100 stock instead

This writer reckons there is a smarter way to invest in Nvidia today without taking on stock-specific risk. Here is…

Read more »

Young lady working from home office during coronavirus pandemic.
Top Stocks

5 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Young Asian man drinking coffee at home and looking at his phone
Dividend Shares

These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Is FTSE 100 takeover target DS Smith a great buy?

A mega-merger between FTSE 100 giants DS Smith and Mondi has the City abuzz. But is there any value in…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

The WPP share price dips as profits fall. Here’s why it could be a top dividend buy

I'm starting to think the WPP share price undervalues the stock, especially if the long-term dividend outlook comes good.

Read more »