2 dividend + growth stocks that could beat the FTSE 100 and help you retire early

Roland Head looks at two stocks beating the FTSE 100 (INDEXFTSE:UKX) and explains why he’d keep buying.

| 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.

One of the easiest ways to build a market-beating portfolio is to focus your investment cash on companies with high profit margins and sustainable growth.

Legendary billionaire investor Warren Buffett is also a fan of this approach. He once said that “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Today, I want to look at two UK stocks which I think have the potential to deliver above-average profits over long periods.

A success story

The share price of small-cap asset manager Miton Group (LSE: MGR) rose by 6% this morning, after reporting a 52% rise in pre-tax profit for the six months to 30 June.

Assets under management rose by 35% to £4,539m during the half-year. Adjusted pre-tax profit was £4.4m, up 52% from £2.9m during the same period last year. The group ended the period with net cash of £21m.

This AIM-listed fund manager built its reputation as a small-cap specialist under the direction of fund manager Gervais Williams. Miton is now starting to diversify, but the group’s investment performance remains strong.

The company has now recorded seven consecutive quarters of net inflows of new client cash. And 91% of its funds have been in the top 50% of rivals since they were launched, or since the current fund manager took charge.

Too late to buy?

One risk for shareholders is that fee income could fall sharply in a market correction. Another is that the firm’s small-cap focus may be hard to scale.

However, I rate Miton as one of the best firms in this sector. I’m also reassured by the net cash balance, which provides about six years’ cover for the dividend.

The stock now trades on 17 times forecast earnings with a 2.5% yield. That’s no longer cheap, but I’m happy to continue holding.

This dip could be a buying opportunity

Another financial stock I rate highly is FTSE 250 online trading firm IG Group Holdings (LSE: IGG). The IG share price dropped 10% last week after the firm revealed a 5% drop in revenue during the three months to 31 August.

This fall was caused by new European regulations, which limit the amount of leverage the firm can offer to retail traders. IG shares have now fallen by nearly 20% from their July peak. But in reality, last week’s update didn’t contain any surprises. The group simply confirmed its expectation that annual revenue could fall by up to 10% as a result of the new rules.

A profit margin of nearly 50%

It’s too soon to be certain of the impact that the new EU rules will have on IG’s profits. But more than 50% of the group’s UK and EU revenue is now generated by clients classified as professional, who are exempt from the new rules.

The group generated an operating margin of 47% last year and has a long track record of high profit margins and strong cash generation. In my view, this year’s expected 15% fall in earnings is now reflected in the share price.

At about 765p, IG stock trades on a forward price/earnings ratio of 15, with a prospective yield of 5.4%. Profits are expected to return to growth in 2019. I rate the shares as a buy at this level and have added the stock to my watch list.

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 owns shares of Miton Group. 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

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »