For many people, retiring early is a key reason for their interest in investing. After all, most people would like to be in a position where they no longer need to work. However, finding the best stocks to take that from an idea to reality can be difficult. However, seeking companies with wide margins of safety could be a good place to start. They may offer reduced downside and significantly greater upside than the wider index. Here are two stocks which seem to offer wide margins of safety and may be worth buying right now.
An unpopular stock
Over the course of the last year, shares in specialist lender Provident Financial (LSE: PFG) have slumped by 8%. This compares to a rise in the price level of the FTSE 100 of 28% during the same time period. Clearly, investor sentiment towards the company is downbeat, with the potential for economic challenges in the UK and Europe in 2017 being a likely reason for this.
Worries that Brexit will put pressure on real-terms disposable incomes are valid. Provident Financial could see its default rate rise, while demand for new loans may fall. Consumers may find their wages do not grow at a rate which equals or exceeds inflation this year, which could cause a downgrade to the company’s forecasts for a rise in earnings of 7% this year and 9% next year.
However, since Provident Financial has a wide margin of safety, it seems to be worth buying for the long term. It trades on a price-to-earnings growth (PEG) ratio of just 1.5, which indicates there is significant upside potential from its current price level. Certainly, in the short run its shares may fail to beat the wider index. But in the coming years it looks set to offer stunning share price growth.
In contrast to the share price performance of Provident Financial, financial services peer Schroders (LSE: SDR) has recorded a capital gain of 28% in the last year. This has compressed its yield so that it now stands at 3.2%. While this is lower than the FTSE 100’s yield of around 3.7%, Schroders could have significantly higher dividend growth potential than the wider index.
In fact, Schroders is expected to increase its shareholder payouts by 6.7% in the next financial year. This is likely to easily beat rising inflation, and would still leave the company’s dividend coverage ratio at a healthy two times. This suggests that dividends could rise at a higher pace than earnings over the long run, leading to a yield which may easily beat that of the wider index.
Since inflation has already moved higher in January and could rise to as much as 3% this year according to the Bank of England, buying stocks with fast-growing dividends may be a smart move. Schroders appears to offer strong dividend growth, thereby providing the potential for investors to profit over a sustained period.
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Peter Stephens 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.