With inflation marching higher, now could be the right time to buy high-yield shares. After all, an income return which beats inflation may become rarer over the medium term. This scarcity value could make companies yielding 4%, 5% or even 6% still more enticing to income-hungry investors. Here are two stocks which could fall into that category, with their current valuations indicating that now could be a perfect time to buy them.
Wide margin of safety
House builder Crest Nicholson (LSE: CRST) faces an uncertain future. Brexit has caused sterling to weaken, which is pushing inflation higher. As such, the affordability of mortgages could come under threat as wages struggle to keep pace with rising prices.
Despite this, the company’s future as an investment appears to be sound. The market seems to have factored-in potential Brexit woes, with Crest Nicholson having a price-to-earnings (P/E) ratio of just 7.8. And with earnings growth forecast to be 9% this year and 10% next year, even a downgrade to its current outlook could see it perform well relative to its sector peers.
Even though the housing market faces a difficult future, Crest Nicolson’s dividend growth forecasts remain high. It is expected to record a rise in shareholder payouts of 38% during the next two financial years. This means that it could be yielding as much as 7.2% in 2018, which is around twice the FTSE 100’s current yield. Given this high yield and its low valuation, Crest Nicholson seems to be a highly attractive purchase for investors seeking a mix of income returns and capital growth potential.
Dividend growth potential
Also offering dividend growth potential is insurance company Esure (LSE: ESUR). Its bottom line is forecast to rise by 32% in the current year, followed by further growth of 8% next year. This is ahead of the wider market’s growth rate and should enable the motor and home insurance specialist to deliver strong dividend growth during the period.
In fact, shareholder payouts are expected to rise at an annualised rate of 13% during the next two years. This should prove to be well above inflation and puts Esure on a forward yield of 5.7%. Its dividend payout ratio is expected to remain relatively comfortable. Even after the planned rise in dividends, profit is due to cover shareholder payouts around 1.5 times. This indicates that dividends could grow at a similar pace to net profit over the medium term without putting the company under financial strain.
Esure currently trades on a P/E ratio of 12.5. This indicates there is upward re-rating potential – especially since it has such promising growth prospects. Certainly, its shares could become increasingly volatile as the momentum towards Brexit builds. However, with a wide margin of safety, low valuation, fast-growing dividends and a high yield, now could be the right time to buy it for the long term.
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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.