One 6% and one 9% yielder I’d buy in 2018

Royston Wild looks at two shares with formidable dividend prospects.

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There is no question in my mind that Stobart Group (LSE: STOB) has the capacity to keep doling out market-mashing dividends long into the future, thanks primarily to the massive earnings potential of its Aviation and Energy businesses.

In recent years the London-based business has been able to fund chunky payout hikes through the sale of non-core assets. And Stobart suggested that there is much more of that to come. The company said in December: “The group has non-operating asset resources available to support the dividend until 2022 and thereafter, dividends are expected to be funded out of operating profits.”

So despite expectations of a 74% earning slide in the year to February 2018, Stobart is still expected to keep dividends rising at an electrifying rate.

Last year’s 13.5p per share reward is anticipated to leap 28% in the current period, to 17.3p. And as a consequence the FTSE 250 business rocks up with a mammoth 6.2% yield. The good news does not stop here either, with City brokers predicting that the payout will rise an additional 6% in fiscal 2019 to 18.3p. This reading moves the yield to 6.5%.

At first glance, growth investors may be put off by the predicted earnings slump at Stobart this year. But this is expected to be a mere flash in the pan as the company is expected to hit back with a 276% bottom-line improvement next year.

Consequently Stobart’s toppy paper valuation, a forward P/E ratio of 134.8 times, falls to a much-improved 35.8 times for fiscal 2019. Sure, this reading also stands above the widely-accepted value watermark of 15 times or under. But a corresponding sub-1 PEG reading of 0.1 suggests Stobart is actually brilliantly valued relative to its growth prospects.

Another dividend star

Those seeking hot dividend stocks trading for next-to-nothing also need to pay Connect Group (LSE: CNCT) close attention.

Restructuring efforts are finally expected to push the newspaper and magazine distributor back into earnings growth after two successive annual reverses, and a 2% bottom line advance is predicted for the year to August 2018. And this results in a dirt cheap prospective P/E multiple of 7.2 times.

Thanks to its strong balance sheet, Connect has managed to overcome its recent profit woes and keep dividends chugging higher. And supported by this year’s expected earnings recovery and falling levels of debt, the business is anticipated to lift the payout again. The 9.8p per share reward forked out last year is expected to rise 2% in the current fiscal period to 10p.

And as a consequence Connect carries a quite astonishing 8.8% yield.

While the Swindon-headquartered business may have to do a hell of a lot of paddling to overcome tough trading conditions, it remains committed to further streamlining to create a formidable earnings generator in the coming years by concentrating on its core units.

Following on from the summer sale of its Education & Books division for a fee north of £50m, Connect hived off its Books division to Aurelius in December in a deal that could raise another £11.6m to bolster its financial firepower. And this gives me further confidence that the business can meet the Square Mile’s monster near-term dividend projections.

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.

Royston Wild has no position in any of the 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.

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