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.

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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.

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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. 

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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.

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