Forget the Cash ISA! I’d rather buy these dirt-cheap dividend stocks instead

Don’t blindly accept the paltry returns of a Cash ISA, says Paul Summers. These stocks are returning far more to their owners in dividends.

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The best instant access Cash ISA is currently paying just 0.9%, according to the consumer website Moneysavingexpert.com. However you try to frame it, that sort of return will never make you rich. As such, it’s natural that many of us are turning to the stock market to generate a half-way decent income. 

The only problem with this strategy is that the coronavirus pandemic has forced many companies to withdraw their cash payouts. Many, but not all. Today, I’m going to look at two minnows that continue to offer very tempting dividends and also trade on low valuations. 

Cash ISA beater

I doubt many private investors are familiar with Wynnstay (LSE: WYN). Let me bring those of you up to speed. This firm manufactures and supplies agricultural products, such as animal feeds, fertiliser, and seeds. It also operates rural outlets, serving farmers and pet owners.

Rather conveniently, the £55m-cap also reported to the market last week. At £229.3m, revenue was 12% lower in the six months to the end of April, compared to the same period last year, as a result of commodity price deflation.

Nevertheless, adjusted operating profit rose 8% to £4.78m, with reported pre-tax profit up 4% to £4.3m. This was deemed a “resilient” performance by management in light of “exceptionally challenging market conditions.

According to CEO Gareth Davies: Wynnstay’s broad spread of agricultural activities is a significant strength, acting as a natural hedge against sector variations.” Even so, the company believes the rest of the year is likely to be tough going, due to the pandemic and Brexit-linked uncertainty. No real surprise there.

Now, what about those dividends? The confirmed interim payout of 4.6p per share might be the same as last year. But the fact the company is willing to pay up in this market environment, gives me confidence. Analysts are forecasting a total return of 14.2p per share in FY20, giving a stonking yield of almost 5.3%.

It’s also worth highlighting that Wynnstay trades on just 9 times earnings. While this may reflect ongoing threats and wafer-thin margins, I’d feel more comfortable taking a risk here than accepting the chicken feed offered by a Cash ISA.

Another dividend delight

Actuarial, consulting, and administration business XPS Pensions Group (LSE: XPS) may not quicken the pulse, but it’s another great small-cap dividend pick, in my view.

Like Wynnstay, it announced numbers to the market last week. Through a combination of new client wins and a boost from acquisitions, total revenue rose 9% to just under £120m in the year to the end of March. Pre-tax profit came in flat at £11.1m.  

I suspect XPS has just what a lot of investors want right now. Thanks to the essential nature of its work, earnings visibility is high. Moreover, the company suspects the pandemic is likely to increase demand for additional services over the short term.

That said, XPS has also said it could lose some earnings momentum. That’s if discretionary projects are deferred by trustees and new business opportunities continue to slow. A similarly mixed outlook then.

And the dividends? A total payout of 6.6p may be the same as the previous year, but this still gives a very satisfying trailing yield of 5.6%. I’d expect something similar in FY21.

Again, the shares aren’t expensive. XPS trades on just 11 times forecast earnings. 

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.

Paul Summers 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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