3 cheap contrarian stocks that pay great dividends

Paul Summers picks out three dividend-paying stocks that could deliver great returns for patient investors.

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Going against the crowd isn’t easy and this is particularly true when it comes to investing. 

Nevertheless, having the courage to buy what others are selling has at least the potential to be very profitable over the long term. In addition to benefiting from a reversal in a company’s share price, contrarians may also receive dividends that can be reinvested into buying more shares along the way, further improving their gains.

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With this in mind, here are three possible recovery plays that, in addition to being relatively cheap to buy, also offer decent payouts.

Get paid to wait

Floorcovering product supplier Headlam (LSE: HEAD) is first up.

Thanks to concerns over declining pre-tax profit from to a weakening residential market and higher costs (not to mention the debacle at peer Carpetright), the company continues to be out of favour with the market. 

The shares are down a third in value from where they were back in 2017 and now trade on a price-to-earnings (P/E) ratio of just under 11. That’s beginning to look reasonable, particularly given the sizeable dividend on offer. 

Assuming it returns the predicted 24.9p per share in 2019, Headlam yields 6% at its current share price, covered 1.5 times by profits. As a comparison, the best cash ISA offers just 1.45%.

While margins aren’t exactly huge in this line of work, the company generates pretty decent returns on the money it invests. At the time of its last interim results, there was also £16m in net cash on the balance sheet. Full-year numbers are out on 6 March.

Next up is investment manager Polar Capital Holdings (LSE: POLR). After a pretty awful second half of 2018 during which investors pulled their money from its funds, the shares now appear to be stabilising. And given that they still trade on just above 10 times earnings, I think there’s decent money to be made in time.

Like Headlam, Polar Capital has a good balance sheet with the equivalent of over 20% of its market cap in cash. Right now, analysts are penciling in a total dividend of 32p per share for the 2018/19 financial year (ending 31 March). That leaves the shares yielding almost 6.5% at the current share price.

Of course, Polar could experience more volatility in the months ahead, particularly if Brexit negotiations fail and no deal is agreed. As such, a bit of pound-cost averaging may be prudent here.

Freight management services provider Xpediator (LSE: XPD) is the final stock on my list. Again, the company’s value has been hit hard in recent times, down 45% from the high of 85p hit last July. Based on last Monday’s trading update, this could be a great opportunity to build a position. 

Total revenues rocketed 54% to £179m over 2018 with over 14,000 customers now on the small-cap’s books. Two recent acquisitions appear to be bedding in well with more likely to follow.

For those concerned by the impact of Brexit, Xpediator stated that it had been “working closely with leading transport associations and port authorities to plan ahead” and boasts that its status as an Authorised Economic Operator will allow it to support companies looking for solutions to get their products to where they need to be. 

Available for just over nine times forecast 2019 earnings, it is set to yield almost 4% at the current share price. These payouts look secure and, importantly, are growing rapidly

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Paul Summers has no position in any of the shares 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.

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