Two 5% dividend stocks that could beat the FTSE 100

With the FTSE 100 (INDEXFTSE:UKX) struggling, Roland Head is looking for unloved dividend stocks.

| 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.

Today I’m looking at two dividend stocks that have each fallen by 20% over the last month.

Although each company faces specific problems, I believe that both of these unloved growth stocks have the potential to beat the FTSE 100 over the next year.

Accounting questions

Shares of aviation services group Air Partner (LSE: AIR) fell by 20% when markets opened on Tuesday after the firm said it had found some historic accounting errors. It seems that a number of bad debts may not have been properly accounted for.

Investigations are still at a preliminary stage, but today’s statement suggests to me that past years’ profits may have been overstated. The company says that “uncollected receivables” (bad debts) were offset against pre-payments from customers, rather than being written off against profits in the appropriate financial year.

The total amount involved is said to be £3.3m, and the period affected stretches from the 2010/11 financial year until 31 January 2018. To put this into context, the firm’s annual profits have been between £2m and £5m per year during this period.

A bargain buy?

Today’s statement stresses that these accounting issues don’t have any impact on the group’s cash position and haven’t disadvantaged any of its customers or suppliers. I don’t see any reason why these issues should affect future profits or cash flow either.

However, it’s worrying that these issues have arisen in the first place, as they suggest poor accounting standards.

After today’s fall, the shares trade on a forecast P/E of 13 with a prospective yield of 4.7%. Although I don’t think there’s any need for shareholders to sell, I’m not sure the shares are cheap enough for me to buy until we know more about this issue.

Printing a profit

Shares of FTSE 250 banknote and identity document firm De La Rue (LSE: DLAR) have fallen 20% since the start of March. The main reason for this was news that the company has lost the contract to produce UK passports.

The current 10-year contract expires in July 2019 and has a value of £400m. I estimate that this is equivalent to between 5% and 10% of annual revenue each year for the company, which is expected to report sales of £505m and a net profit of £48m for the year ended 25 March.

A contrarian buy?

Press reports suggest that De La Rue plans to appeal against the decision to award the contract to French-Dutch firm Gemalto. But even if the appeal is unsuccessful, I believe the shares could be a contrarian buy at current levels.

The business remains out of favour, thanks to a £191m pension deficit and a forecast for earnings to fall by 8% in 2018/19.

But the pension deficit has fallen by almost half since September 2016 and is expected to shrink by a further £70m this year. The group’s profits have also staged a strong recovery since 2016.

Analysts have pencilled in earnings of 43.4p per share and a dividend payout of 26.9p per share for 2018/19. These figures put the stock on a forecast P/E of 11.7 with a prospective yield of 5.3%. I think the shares could be a long-term buy at this level.

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 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.

More on Investing Articles

Young Asian man shopping in a supermarket
Investing Articles

I’d shun Lloyds Banking Group and consider this stock for passive income instead

This company's dividend record knocks spots off Lloyds Banking Group's, and it looks like decent value now with a yield…

Read more »

Investing Articles

Will the 5.6% BT Group dividend yield grow in 2024?

Zaven Boyrazian explores whether BT Group can continue hiking its dividend and if the telecoms giant belongs in his income…

Read more »

Investing Articles

FTSE 100’s near a 52-week high, but this stock’s still dirt cheap!

The FTSE 100's on the rise, but not all stocks have been so fortunate. Here’s one company that got left…

Read more »

Investing Articles

Is this ‘secret weapon’ a multi-billion pound reason to buy Lloyds shares?

Dr James Fox explains how Lloyds shares could rise even higher as the bank's 'strategic hedge' is likely to boost…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

3 of the best penny stocks for growth, dividends, and value!

Looking for top penny stocks to buy? Royston Wild believes these UK small-cap shares could prove lucrative investments in the…

Read more »

Investing Articles

How I’d aim to turn an empty ISA into £275k by purchasing cheap shares this summer

Harvey Jones is taking advantage of the summer stock market lull to buy cheap shares and build a high and…

Read more »

Investing Articles

What’s the minimum I need to invest every month to earn a meaningful passive income?

When looking to secure a stream of passive income it's important to be realistic. Our writer investigates a strategy to…

Read more »

Investing Articles

These 2 great value income stocks could help me get rich and retire in style

These two FTSE 100 income stocks have terrific track records of dividend growth and Harvey Jones wants them in his…

Read more »