Got £1k to invest? I’d buy this FTSE 250 dividend stock to beat my State Pension

FTSE 250 (INDEXFTSE:MCX) growth stocks could help you beat the market, says Roland Head.

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If you’re worried about having to survive on the State Pension when you retire, then you’re not alone. Although the full payout of £164.35 per week might cover the bare essentials, it’s unlikely to leave room for much else.

I believe one of the best ways to boost your retirement income is to build up your own stock market fund. By focusing on profitable, good quality businesses, you could enjoy steady gains without too much risk.

Today, I want to look at two companies that are on my radar at the moment.

You’ll know this one

First up is newsagent WH Smith (LSE: SMWH). This firm’s travel stores are often the only way to buy magazines, chocolate bars, phone chargers and other ‘essentials’ at airports and railway stations.

Prices are higher than elsewhere, but customers seem happy to pay up. Travel sales rose by 8% during the 20 weeks to 19 January, or by 16% when the acquisition of US travel retailer InMotion was included.

The group’s international business is a key part of this investment story. Expanding overseas has opened the door to a much bigger market than the UK. The group now has 420 international stores, spread across 28 countries and 90 airports.

Why I’d buy

This is an extremely profitable business. Most stores require minimal investment, other than a lease or rent. As a result, WH Smith’s return on capital employed was 56% last year. This means that for every £1,000 invested in the business, the group generated an operating profit of £560. In one year.

Most of this profit is returned to shareholders through dividends and buybacks, which boost future earnings per share. Although the continued decline of its high street business is a risk, this has been well managed so far. I don’t see it as a big concern.

Indeed, I think the stock’s 2019 forecast price/earnings ratio of 17.2, and 2.9% dividend yield, look decent value for such a profitable business. I’d rate WH Smith as a long-term buy.

A fast flyer

My next choice is budget airline Wizz Air Holdings (LSE: WIZZ), which focuses on Central and Eastern Europe.

Since its stock market flotation almost four years ago, its shares have risen by 138%. This compares to a 23% fall for Western Europe-focused easyJet.

During the third quarter, Wizz Air’s revenue rose by 21.2% to €512.7m as it continued to add new routes. The airline’s load factor — the percentage of seats sold — rose 2% to 91.4%, which is a decent result.

Yet despite all of this, the group’s total operating costs for the period rose by 25.6% to €512.7m. In other words, revenue and operating costs were equal. Quarterly profit fell to just €1.7m.

At first glance this seems worrying. But I don’t think things are as bad as they seem. Like most travel operators, Wizz Air’s business is highly seasonal. During the first half of the year (March-September), the airline reported a profit of €292.2m.

That’s enough to meet the firm’s full-year profit guidance of €270m-€300m. All Wizz Air needs to do is to avoid losing too much money during the final quarter of the year.

Management is confident. I’d suggest that the business could be fair value for a long-term buy, on 15 times 2019 forecast earnings.

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 easyJet. The Motley Fool UK has recommended WH Smith. 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.

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