£5k to invest? I think these FTSE 250 dividend stocks could double

This Fool explains why he believes these two FTSE 250 dividend stocks are hugely undervalued at current levels.

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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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As the stock market has plunged, bargains have started to emerge for investors who are willing to take a long-term view of things. Some FTSE 250 dividend stocks have become particularly attractive.

They could even have the potential to double over the next few years as the economy recovers.

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FTSE 250 dividend stocks

Security outsourcing group G4S (LSE: GFS) isn’t usually considered to be a top FTSE 250 dividend stock. However, the company has earned its stripes recently as it successfully navigates the coronavirus outbreak.

In its latest trading update, G4S told investors that the outbreak has, so far, had an “immaterial” impact on the business. This suggests the company is well-placed to weather the storm. It could even come out stronger on the other side. G4S could use its substantial resources to acquire smaller, struggling competitors, boosting overall growth.

Even at the company’s current growth rate, City analysts are forecasting steady earnings growth over the next two years. The stock is trading at a price-to-earnings (P/E) ratio of 5.6 and supports a dividend yield of 9.5% at current prices.

Historically, shares in the outsourcing business have changed hands for around 10 times earnings. That suggests the stock could be undervalued by approximately 50%. These figures imply G4S is a FTSE 250 dividend stock that’s worth snapping up today. Earnings cover the payout 1.9 times. 

Redrow

Another FTSE 250 dividend stock that might be worth buying after recent declines is homebuilder Redrow (LSE: RDW).

No matter what happens to the global economy over the next few weeks or months, people will still need homes. What’s more, the UK housing market remains chronically undersupplied, and a total shutdown of the economy won’t change that. It will only delay the building. When activity resumes, Redrow’s sales and earnings should start to grow quickly again. 

So, even if Redrow does suffer some disruption, over the long run, this FTSE 250 dividend stock should continue to produce attractive returns. 

At the time of writing, shares in Redrow support a dividend yield of 5%. Moreover, the stock is currently changing hands at a P/E ratio of 6.7. That’s compared to its historical average, which sits in the mid-teens.

With this being the case, Redrow looks attractive as a long-term income investment at the current levels. 

Further, although the group will likely suffer some disruption to its operations due to the coronavirus outbreak, it has plenty of resources to weather the storm. 

At the end of its last financial year, the company reported a net cash balance of more than £120m. That should be more than enough to keep the lights on if Redrow has to shut down operations for a short period. The company would be able to run a skeleton staff while preparing to ramp up growth when the economy returns to normal. 

That’s why it could be worth taking a closer look at this FTSE 250 dividend stock. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Redrow. 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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