While the FTSE 100 trades above 7,000 points, there are still a number of stocks which offer dirt-cheap valuations. As such, they may be able to provide relatively high levels of capital growth over the long run. When coupled with dividends that could outpace what may prove to be high levels of inflation, such companies could be worth buying. Here are two examples which could help you retire early.
While there is significant uncertainty surrounding housebuilders such as Persimmon (LSE: PSN), its dividend prospects and wide margin of safety could make it a worthwhile investment for the long run. For example, it currently trades on a price-to-earnings (P/E) ratio of 10.3, which is below its five-year average rating of 12.4. This indicates that it offers upward re-rating potential, which could be realised if the company meets its forecast growth rate.
Persimmon is due to record an increase in earnings of 2% this year and 3% next year. While this growth rate is below that of the wider index, it could send a positive message to investors about the state of the UK housing market. And with a dividend yield of around 5.6% from a dividend which is covered 1.8 times by profit, the company remains one of the most attractive income stocks in the FTSE 100 for long-term investors.
Clearly, Persimmon lacks the stability of other higher-yielding shares such as those in the utility or tobacco sectors. However, it has a wide margin of safety which could mean its shares not only outperform the wider index in 2017, but do so over multi-year period. As such, it is a stock which could help you retire early.
Rapid dividend growth
With inflation set to move higher over the medium term, companies which are able to raise dividends at a rapid rate could become increasingly popular among investors. That’s because an ability to obtain a real-terms rise in income may prove elusive to many investors over the coming years. As such, investing in lending specialist Provident Financial (LSE: PFG) could be a shrewd move.
It is expected to raise dividends per share by 16.5% over the next two years. This should keep its yield of 4.5% well ahead of inflation, and since dividends are covered 1.3 times by profit they seem to be highly affordable and sustainable.
Certainly, demand for new loans and the ability of borrowers to service existing loans may come under pressure. This could mean that Provident Financial’s earnings growth rate is downgraded somewhat during the course of the year. However, with its shares trading on a price-to-earnings growth (PEG) ratio of just 1.7, they seem to offer a sufficiently wide margin of safety to merit investment for the long term.
As with Persimmon, lower risk stocks can be found in the FTSE 100. But since they trade on such low valuations and have strong dividend prospects, Provident and Persimmon seem to be logical buys for investors with an eye on early retirement.
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.