3 overlooked income buys? Royal Bank of Scotland Group plc, ICAP plc & Carillion plc

Royal Bank of Scotland Group (LSE: RBS) may not be an obvious choice if you’re looking for dividend stocks. But this could be a short-sighted view.

RBS is gradually getting closer to restarting shareholder payouts. The firm’s shares slumped in February when chief executive Ross McEwan said that dividend payouts were likely to restart later than his original target of Q1 2017.

I believe this could be an opportunity for investors with a longer-term view. Analysts still expect RBS to make a dividend payment of 7p per share in 2017. That represents a 2.9% yield and would be covered three times by forecast earnings.

This suggests that dividend growth from 2018 onwards could be substantial. As we’ve seen with Lloyds Banking Group, investors who bought early — before dividends were restarted — are now enjoying very high dividend yields on their original purchase price.

In my view, now could be a smart time for income investors to start building a long-term holding in RBS.

A profitable new direction?

Financial trading and services firm ICAP (LSE: IAP) is facing an uncertain future. At least, that’s the bearish argument. Having decided to sell its voice broking unit to rival Tullett Prebon, ICAP has a hole to fill.

The group has decided to embrace the opportunity to modernise and will be renaming itself NEX Group. NEX will focus solely on electronic markets and post-trade services. This is a growing area, not only in London but in less developed overseas markets.

This morning, ICAP announced the first stage of its planned expansion into China — a potentially huge market. In a deal valued at $65m over three years, ICAP will use its systems to provide a variety of electronic trading facilities for the China Foreign Exchange Trade System, a key platform.

ICAP shares aren’t especially cheap. The firm’s shares currently trade on a 2016 forecast P/E of 16, with a forecast yield of 5.3%. This stock isn’t without risk, but I suspect ICAP’s move to focus solely on electronic markets could be profitable. I reckon the shares could be a good medium-term buy.

How risky is this 7% yield?

Low margin construction and outsourcing firms are often rightly seen as risky. They can be vulnerable to client spending cuts or costly project-specific problems.

However, I rate Carillion (LSE: CLLN) as one of the bigger and better players in this market. The group has generated fairly consistent profits since 2010 and has an operating margin of about 5% — notably higher than some competitors.

Despite this, Carillion is one of the most-shorted stocks in the FTSE 350. Investors are concerned that while year-end net debt was quite low, the average level of net debt last year was a worrying £538.9m. This looks risky to me, relative to last year’s post-tax profit of £139.4m.

A sustained sell off has left Carillion trading on just 8 times forecast 2016 earnings, with a prospective dividend yield of 6.9%. If the company can deliver on forecasts for earnings growth of about 5% this year and in 2017, then the shares could be a profitable buy.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.