The Motley Fool

Can you afford to miss this FTSE 100 7% yielder?

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.

Person smoking cigarette
Image source: Getty Images.

I’m always on the lookout for high-yield dividend stocks with affordable payouts.

My aim is to find stocks that are about to come back into favour with investors, triggering a major re-rating. Today I’m looking at two possible examples.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

On the cusp of a turnaround?

My first stock is specialist manufacturer Essentra (LSE: ESNT). This FTSE 250 firm makes a range of products. These include cigarette filters, specialist packaging for the health and consumer sectors and plastic components for a wide range of applications.

Cigarette filters generated £34.8m of operating profit last year — about 40% of the group’s total operating profit. Most of the remaining profit came from the components division, which generated £58.7m from a wide range of industrial customers.

Essentra has lost more than 45% of its value since 2015, when the stock peaked at over 1,000p. But the board’s restructuring programme is now largely complete. Management guidance for the year ahead is for “a return to like-for-like revenue growth and margin expansion” in 2018.

I’m tempted by this 4.9% yield

Broker forecasts for 2018 suggest that the group’s adjusted earnings will rise by 11% to 24.5p per share, with a dividend of 20.8p per share. These figures put the stock on a forecast P/E of 17.5 with a prospective yield of 4.9%.

Although earnings cover for this dividend is slim, I don’t expect the payout to be cut now that profits are rising again. With profits expected to climb a further 15% in 2019, I’d rate Essentra as a buy at current levels.

This 7% yield may be worth buying

Although the long-term decline in cigarette smoking is old news, investors are starting to get concerned that next-generation vaping products may not be able to replace these lost sales.

UK number two Imperial Brands (LSE: IMB) has seen its share price fall by more than 30% over the last year. This stock now offers a forecast yield of 7.4%, but even that hasn’t been enough to tempt dividend investors back into the shares.

It’s certainly true that high yields such as this are often a sign that a dividend cut is likely. But sometimes the market just gets it wrong for a while.

I’m turning bullish

Imperial Brands’ key attraction for investors is its free cash flow. Historically this measure of surplus cash has broadly matched the group’s earnings, providing support for a very high level of dividend payouts.

Measured in this way, the group’s forecast dividend of 187p per share looks to me like it should be affordable. The only potential problem is the high level of debt.

Because management have focused on returning free cash flow to shareholders, most of the acquisitions made in recent years have been funded with borrowed cash. This left the group with net debt of £12.1bn at the end of September 2017. That’s nearly five times forecast profits for this year, which seems a little high to me.

Net debt fell by £800m last year. If this total continues to fall this year, then I suspect the dividend will be safe. We’ll find out more when the group publishes its half-year results on 9 May. Until then, I’m going to give the stock a cautious buy rating.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Essentra. The Motley Fool UK has recommended Imperial Brands. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.