An overlooked 6%+ dividend I’m thinking of buying right now

Small companies can provide reliable long-term income too. Read on to learn of two with well-covered dividends and big yields.

| 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.

sdf

Redde (LSE: REDD) is a company I’ve liked the look of for a little while as a provider of regular high dividends. I think it’s largely gone under the radar of many investors.

We’ve seen decent EPS growth for the past few years, though P/E valuations have perhaps suggested the shares were fully valued — especially as the firm is in the nebulous support services industry, in this case in the motor trade, offering accident management support, legal services, fleet management, and things like that.

Then in March this year, the share price crashed after the company revealed it had failed to renew a hire and repair contract with a large insurer. The financial effect was estimated at an 18% reduction in consensus revenue forecasts, with an 8.7% hit to adjusted operating profit. The share price has recovered a little since then, but it’s still down 37% over the past 12-months.

Update

But things could be better than they appear after the firm released a trading update Wednesday. The failed contract, scheduled to end in July, will now be tapered downwards to November, and that will lessen the drop in profits. The company also says “there have been a number of new contract wins in other parts of the Group as well as a contract renewal with a major insurer.”

Even being pessimistic on full-year profits, and assuming a 9% EPS fall based on original estimates for operating profit, I still can’t see the shares on a forward P/E of much more than nine. I obviously don’t know what’s going to happen to the dividend, but with the share price so low I can see plenty of scope for a cut while still maintaining a yield close to last year’s 6.6%.

The share price fall looks overdone to me, and Redde is on my shortlist.

Pleasantly dull

Topps Tiles (LSE: TPT) is another company that looks cheap on fundamentals. It’s the kind of nicely boring company that can just keep plodding along generating cash and handing out tasty dividends. And while supplying wall and floor tiles and similar coverings might sound like a business that’s relatively easy to compete with, Topps’ scale (as “the UK’s leading tile specialist”) gives it a big defensive barrier, in my view.

The past few quarters have been tough in the current, squeezed retail environment, and I think it’s been wise to wait until we hear more of how 2019 is progressing.

Wednesday’s Q3 update showed an improvement in like-for-like sales. Though the first half brought a weak 0.2% rise, sales in Q3 are up 3.8%. The company has launched 25 new product ranges so far this year, and those released in the last 12 months contributed 20% to sales.

Valuation

Forecasts currently suggest essentially flat EPS over the next couple of years, but that leaves the shares on P/E multiples of under 10. 

My one caution is with Topps’ net debt, which stood at £18m at the halfway stage at 30 March. That’s about 1.7 times annualised pre-tax profit, which makes me a bit twitchy. But it’s a big improvement on a net debt figure of £25.1m a year ago.

With a policy of keeping dividend cover at around two times, and with dividend yield forecast to reach 5.3% in 2020, I’m watching — but I’ll wait for full-year results. 

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.

Alan Oscroft 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.

More on Investing Articles

Close-up of children holding a planet at the beach
Investing Articles

This FTSE 100 stock’s suddenly become the highest-yielder on the index!

The league table of FTSE 100 (INDEXFTSE:UKX) dividend stocks has a new number one. But our writer explains why there…

Read more »

Rear View Of Woman Holding Man Hand during travel in cappadocia
Investing Articles

Is this under-the-radar UK stock as cheap as its rooms?

Our writer’s been keeping an eye on a little-known UK stock that operates in a niche, but profitable, sector of…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

It’s a ‘Fabulous Friday’ for holders of these FTSE 100 shares!

Four members of the FTSE 100 (INDEXFTSE:UKX) are making their latest dividend payments today (11 July). Our writer takes a…

Read more »

Man riding the bus alone
Investing Articles

Check out this spectacular FTSE 250 stock

UK investors willing to look beyond the FTSE 100 can find some outstanding companies. Online advertising business Baltic Classifieds might…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

The JD Sports share price is down 18% in a year. And the stock’s only yielding 1.1%. Here’s what I’m doing…

With the JD Sports share price struggling and a tiny dividend on offer, there doesn’t appear to me much going…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

How long would it take an owner of Legal & General shares to get their money back in passive income?

Our writer looks at the passive income potential of Legal & General, one of the highest-yielding shares on the FTSE…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Small but mighty: 2 FTSE 250 growth shares beating expectations

Mark Hartley picks out two lesser-known FTSE 250 shares delivering outstanding earnings growth – but with share prices that are…

Read more »

ISA Individual Savings Account
Investing Articles

Stocks and Shares ISA: is lump-sum investing better than pound-cost averaging?

Is it better to invest in a Stocks and Shares ISA all at once or drip-feed with pound-cost averaging? Mark…

Read more »