I think many investors believe that in order to be successful in the stock market, timing is very important. However, it is impossible to know when the exact right time is to enter or exit a certain stock.
I’d rather buy a good basket of dividend stocks and sleep well at night. Although there will likely be some volatility in the short term, the good safe dividend stocks should be winners in the long term. Here are two dividend stocks that I think are good buys for investors now.
Take advantage of the market overreaction
Galliford Try (LSE: GFRD) is a house building, regeneration and construction company, with three businesses segments: Linden Homes, Partnerships & Regeneration, and Construction. Among the three, the Linden Homes segment generates more than 85% of the total company’s operating income, with the highest operating margin in the range of 18%-19%. The Construction segment is the biggest revenue generator, but the operating margin is super-thin, at only 0.9%.
Since 2013, Galliford Try has been generating consistent profitability, double digit returns on equity and paying uninterrupted dividends. In 2018, it delivered £151.2 million in operating profit, with 17.5% return on equity. Dividend per share came in at 77 pence, with a reasonable payout ratio at 64%.
Of course, Brexit has had a negative impact on economic activity in general, and the construction business in particular. Galliford Try can feel the impact, issuing a warning that annual pretax profit would be around £30 million to £40 million lower than analysts’ estimate of £156 million, while the annual dividend would be cut by 18%, from 28 pence to 23 pence per share. After that profit warning, the company’s share price tumbled an additional 20% on the day.
I believe the market has overreacted. According to its warning, Galliford Try’s 2019 pretax earnings would be £116 million. Trading at 549.5 pence at the time of writing, Galliford Try is valued at only £605 million. Thus, the pretax earnings valuation is only 5.2x. If annual dividend payment is cut by 18%, it would be 63.14 pence per share, yielding 11.5% with the current share price.
Another cheap but high-yield housebuilder
Persimmon (LSE: PSN) is a much bigger house-building company in the UK. In 2018, it sold 16,449 homes with an average selling price of £215,560, generating more than £2 billion in sales.
Since 2013, Persimmon has managed to consistently grow revenue and operating profit. During that period, the company’s annual compounded growth of operating earnings is very high, at 26%. Along with the high growth, Persimmon has also delivered high return on equity, ranging from 17.6% to 27.7% in the same period.
Although Persimmon has a good track record of business growth and operating profitability, the market still values the company quite cheaply. It is trading at 2,060 pence per share at the time of writing, valuing the company at only 7.38x price-to-earnings.
The dividend payment is the shareholders’ capital return plan between 2012-2021, with the total payment of £1.9 billion. From June 2019 to June 2021, the plan is to return to shareholders as much as 455 pence per share. Apart from a 125 pence dividend per share paid in March 2019, the company plans to pay an additional 110 pence dividend per share to shareholders in July 2019. Thus, at the time of writing, the dividend yield for 2019 would be around 11%.
Foolish takeaway
Both Galliford Try and Persimmon have good histories of consistently profitable business operations. With the cheap price-to-earnings valuation, and juicy dividend yield at this time of writing, I’d consider those two dividends stocks as good buys now.
