3 cheap 8%-yielders you can’t afford to miss

Rupert Hargreaves looks at three undervalued stocks with yields of just under 10%.

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Homebuilder Persimmon (LSE: PSN) currently holds the title of the highest yielding dividend stock in the FTSE 100, making it one of the best dividend stocks on the market today for income seekers.

Since its near-death experience in the financial crisis, Persimmon has been on a mission over the past decade to rebuild its reputation. 

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As part of this goal, the group has introduced a Capital Return Plan, which was initially targeting a surplus capital distribution to shareholders of £6.2 per share between 2012 and 2021. But, thanks to better-than-expected trading, it’s been increased by 110% to £13.00 per share to 2021. 

So far, the group has only distributed £6.20 with a balance of £6.80 remaining. If it hits this target, Persimmon will return 27% of its current market value between today and 2021 (9% on an annual basis).

With cash on the balance sheet of £1.3bn, it certainly looks to me as if the group has the financial firepower to hit this target. At the same time, the stock trades at a highly attractive forward earnings multiple (P/E) of 9.4. So, Persimmon is both an income champion and value stock.

Look past the problems 

Galliford Try (LSE: GFRD) is another dirt-cheap income stock I believe could make a great addition to any portfolio.

Even though analysts have revised down their expectations for growth in 2018 and 2019, Galliford’s earnings per share are still expected to grow 12% in 2018 to 146p, and register a small, positive expansion next year. 

Based on these estimates, shares in the homebuilding and regeneration group are trading at a forward P/E of 6.3 — the lowest valuation the market has awarded the company in over five years.

That said, analysts are expecting a slight downward revision of the group’s dividend this year. The City’s target is 77p, down 11% from last year’s 86p. 

Still, even at the lower level, the payout is equivalent to a dividend yield of 8.4% and it’s also covered 1.9 times by earnings per share, leaving plenty of headroom if earnings contract.

As my Foolish colleague Harvey Jones recently noted Galliford isn’t without its problems, but management seems to have operational issues in hand, and the issues certainly don’t seem to justify the rock-bottom valuation.

Margin of safety 

Shares in transport group Stagecoach (LSE: SGC) have taken a hammering after it was revealed that the company, and its partner Virgin Group, have taken a loss of more than £200m on their East Coast franchise, which operates intercity services between London Kings Cross and Scotland. 

Now, analysts are expecting nothing but pain for the group for the next few years. City analysts reckon EPS could fall 18% in the year to 30 April, then by 11% and 9% in the two years that follow

While it’s difficult to feel enthusiastic about Stagecoach’s falling earnings, the company’s dividend yield provides some solace as it currently stands at 8.3%. 

And even though profits are set to slide, even the most pessimistic analyst forecasts suggest dividend cover will remain above 1.5 times for the next two years. With this being the case, it looks as if the payout is here to stay for the foreseeable future. 

Moreover, while the company might not have the brightest growth outlook, the stock’s valuation of 7 times forward earnings (P/E) offers a wide margin of safety in my view.

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Rupert Hargreaves owns no share 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.

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 considered, so you should consider taking independent financial advice.

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