Got £2k for a Stocks and Shares ISA? Two 7%-yielders I’d buy today

Roland Head highlights two contrarian picks he thinks could be profitable buys.

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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.

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This year’s ISA deadline is in just two days. I wouldn’t rush to make any last minute investment decisions, but if you are still looking for stock ideas, then I want to look at two 7% dividend stocks I think could be a profitable buy at current levels.

A turning point

Shares in online financial trading firm CMC Markets (LSE: CMCX) have fallen by more than 50% over the last year. The firm has been hit by the impact of new regulations limiting the amount of ‘leverage’ — or credit — it can offer to its retail customers. But something happened this morning which makes me think the worst is now over.

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CMC issued a trading update warning that revenue for the year ended 31 March would be lower than expected due to the impact of the rule changes. The group’s revenue is expected to fall by 37% to £131m this year, well below City consensus forecasts of £148m.

However, management said that there are signs the situation is stabilising. Importantly, chief executive and founder Peter Cruddas remains confident in forecasts for 2019/20. City analysts expect the firm’s profit and revenue to bounce back in the 2019/20 financial year. Revenue is expected to climb to £167.5m and earnings are expected to rise to 8.9p per share. Crucially, the dividend is expected to return to growth, with a forecast payout of 5.9p per share.

These forecasts price CMC shares at just 9 times 2020 earnings, with a dividend yield of 7.1%. If Cruddas can deliver on these expectations, I believe the shares look very good value at current levels. With overseas diversification continuing, I’d buy.

A good business going cheap?

Cycle and car parts retailer Halfords Group (LSE: HFD) shocked the market in January with a profit warning. I wasn’t completely surprised. Conditions are tough in retail and the company had indicated previously that trading was likely to be more subdued than the previous year.

The firm’s latest guidance is for a reduction in profits for the year ended 30 March, followed by a flat performance in 2019/20. How realistic is this? We can’t be sure, but in my view this business has certain advantages that leave it in a stronger position than some high street rivals.

Key among these are that Halfords has low levels of debt and enjoys strong cash generation. This business is also more profitable than some other big retailers, such as supermarkets. These advantages should help to protect the dividend and provide the cash needed to return the business to growth.

Chief executive Graham Stapleton hopes to turn the business around by focusing more on offering services for motorists and on improving the group’s credentials as a specialist cycling retailer.

Stapleton also hopes that the group’s Autocentres car maintenance business will continue to help attract new customers, broadening Halfords customer base.

This strategy isn’t without risk — Halfords could face a slow decline. But the firm’s financial performance and solid track record suggest to me that this could be an opportunity for contrarian investors.

With the shares trading on 10 times 2019 forecast earnings and offering a covered dividend yield of 7.5%, I think Halfords could be worth a closer look.

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Roland Head 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.

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 considered, so you should consider taking independent financial advice.

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