2 dividend stocks with yields over 10% I’d buy now

Author Anh Hoang reveals two UK dividend stocks with yields over 10% which that are valued cheaply in the market.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.  

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.

Neither Anh nor The Motley Fool UK hold a 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.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »