Finding the best income stocks can be a tricky process. Today, I’m looking at two companies with 5%-plus dividend yields I believe could be great additions to any portfolio.
Out of favour
Transforming waste to energy might not be an exciting business, but for Renewi (LSE: RWI), it’s a profitable enterprise. The international firm, formed last year when UK-based Shanks group merged with a large European peer, reported “encouraging volume growth” back in July when management updated the market on trading for the second quarter.
That said, integrating two of the largest waste companies in Europe has hardly been pain-free. For the financial year to the end of March, the enlarged group reported a loss of £48m (going forward, the company will report earnings in euros).
Still, despite the shaky start, I reckon the long-term outlook for Renewi is bright. Integration savings are on track to hit €30m for the year ending 31 March 2019, which should help stabilise the business. Today, management announced the sale of its 50% stake in the anaerobic digestion facility in Cumbernauld as part of the streamlining.
When integration is complete, Renewi can concentrate on growth. As demand for recycling services only grow, Renewi should have no problem expanding sales.
City analysts believe the company can produce a net profit of £54m for fiscal 2019, rising to £63m for 2020. These numbers translate into earnings per share (EPS) figures of 6.5p and 7.9p, respectively, giving a forward P/E of 8 for 2020.
Such a low valuation for a company that dominates a large, specialist and expanding market like recycling is attractive in my view. And on top of the discount valuation, shares in Renewi also support a dividend yield of 4.9%, which analysts believe will grow to 5.4% by 2020.
Passport battles
Usually, banknote printer De La Rue (LSE: DLAR) operates in the background. However, the company found itself in the headlines earlier this year when it was refused a £260m contract to manufacture blue passports for the Home Office when Britain leaves the European Union.
This spate of publicity was highly unusual for a company obsessed with security. Indeed, De La Rue’s banknote and passport production facilities are reportedly some of the most secure premises in the country — as one of the world’s largest banknote producers, it’s no surprise why.
Unfortunately, the loss of the blue passport contract hasn’t been the only piece of bad news for De La Rue’s shareholders. In March, the stock cratered when management warned that operating profits would be “in the low to mid £60m range,” as much as 17% below City expectations.
The good news is, after these declines, the stock looks too cheap to pass up. Right now, De La Rue is trading at a forward P/E of just 10.7, and yields 5.3%. For one of the world’s most prominent security document and banknote producers, this seems far too cheap.
In a world where personal security, both on and offline, is only becoming more critical, De La Rue stands out. With this being the case, I reckon over the long term it is well-placed to succeed.
