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Why I think this income stock yielding 7.6% deserves a place in your ISA

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Today, sofa and flooring retailer SCS (LSE: SCS) reported an increase in gross sales of 2.1% for the 26 weeks ended 26 January and a rise in gross profit of 1.5%. Underlying operating profit also improved by £0.3m to £0.8m. Impressive?

Certainly, considering the state of the rest of the UK retail industry. The fact that SCS is still growing, albeit slowly, at a time when many other UK retailers are struggling to survive is notable.

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What’s more notable in my opinion, however, is the company’s cash generation. During the 26-week period the company generated £20.7m in cash from operations, up £2.5m year-on-year, or just under 14%. With cash flowing into the group’s bank accounts, SCS’s net cash balance at the end of January hit £62.5m, a staggering 70% of its market capitalisation at the time of writing. 

Cash cow

Few other companies have such a strong, cash-rich balance sheet, and that’s why I think this stock deserves a place in your ISA today.

Alongside today’s numbers, management also announced an increase in the group’s interim dividend of 3.8% to 5.5p. A similar full-year increase will give a total payout of 16.8p per share for 2019, offering a yield of 7.6% at the time of writing, according to my number crunching.

As the total dividend only cost the firm £6m last year, it looks as if SCS has more than enough capital to meet its dividend obligations for many years to come. 

Keeping your portfolio fit

One future income champion that I also think would be worth keeping an eye on is The Gym Group (LSE: GYM).

This company is still in growth mode. Today, it reported a 35.6% increase in revenue for the year to the end of December 2018. Adjusted profit before tax increased 19.4% to £14.4m. Off the back of this growth, management has announced an increase in the full-year dividend of 8.3% to 1.3p.

At the current share price, a distribution of 1.3p gives a dividend yield of 0.6%, which I don’t think is particularly attractive when the market average is above 3%. However, it’s the Gym Group’s future potential that really gets me excited.

Last year, the company generated just under £34m in cash flow from operations. Right now, all of this money and more is being reinvested back into the business. But the figures tell me that when management decides to take its foot off the growth pedal and start returning cash to investors, returns could soar.

Indeed, according to my research, the average profit margin on each of the Gym’s established locations is over 40% and return on capital — a measure of profitability for every £1 invested in the company — is above 30%.

In my opinion, these high levels of probability imply the company is a future dividend champion. With earnings set to expand another 38% in 2019, according to the City, it also appears as if the shares are undervalued on a group basis as they are currently dealing at a PEG ratio of 0.8.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended The Gym Group. 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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