Adding a new company to your portfolio is a big decision. It’s tempting to focus on companies that feel familiar, perhaps because they get high levels of coverage in the investment press. But this approach can lead to a portfolio that’s unlikely to outperform the wider market.
The good news is that even within the FTSE 100, there are a number of high-quality income stocks that are overlooked by many investors. I’ve picked three I believe have the potential to beat the wider market in 2017.
A 21% growth rate
Packaging group Mondi (LSE: MNDI) employees 25,000 people in more than 30 countries. Using the wood from 2.4m hectares of managed forest, the group produces more than 100,000 packaging solutions for its customers.
Mondi is clearly a big business, but its £8.1bn market cap is relatively small by FTSE 100 standards. This may be one reason why the firm’s after-tax profits have been able to rise by an average of 21% per year since 2010.
Shareholders haven’t been forgotten, either. Mondi’s dividend payout has increased by an average of 17% per year over the last six years. This payout is well covered by free cash flow and earnings, and is expected to rise by 5% in 2017.
With a forecast P/E of 14 and a prospective yield of 3%, I believe Mondi could make a smart income buy.
DIY income should rise
Last year was a tough one for Kingfisher (LSE: KGF), which owns B&Q and Screwfix in the UK.
The group’s French businesses, Castorama and Brico Dépôt, has reported falling sales in a soggy domestic market. This offset most of the gains seen in the UK, where like-for-like sales rose by 6.7% during the first half of the year.
With a market cap of £7.9bn, Kingfisher is similar in size than Morrisons and Sainsbury’s. However, the group’s fundamentals are considerably more impressive. Kingfisher reported a trailing operating margin of 5.3% at the end of July, along with net cash of £898m.
Around £600m of this cash is currently being returned to shareholders through a mix of share buybacks and dividends. Meanwhile, chief executive Veronique Laury is working hard to cut costs and boost sales.
Kingfisher trades on a forecast P/E of 15 and offers a 3% yield. I believe the shares could be worth a closer look at this level.
This 6.6% yield is no joke
FTSE 250 spread betting firm IG Group Holdings (LSE: IGG) lost 38% of its value last month. This sudden fall was the result of the FCA’s plan to limit the level of leverage available to retail investors, most of whom lose money from spread betting and CFD trading.
I expect IG Group’s profits to suffer as a result of this move, but I don’t think the company is the FCA’s main target. Many of IG’s clients are sophisticated investors who do make money from their trading activities. I believe the FCA is targeting less-reputable firms that market aggressively to inexperienced investors.
The group’s shares currently trade on a forecast P/E of 10, with a prospective yield of 6.6%. IG’s scale and quality suggest to me that it will survive and prosper. I believe the shares could be a good turnaround buy at current levels.
