Neil Woodford just bought a dividend stock you’ve probably never heard of

Acclaimed fund manager Neil Woodford’s biggest holdings are blue-chip dividend stocks that will be very familiar to you. AstraZeneca, GlaxoSmithKline, Imperial Brands, British American Tobacco and Legal & General are the top five companies in his flagship equity income fund.

However, the market was notified this week that Woodford has taken a 10.2% stake in a business that many readers have probably never heard of. For one thing, the company was floated barely more than a year ago, and, for another, the market it’s on is AIM.

However, like Woodford, this doesn’t put me off. The company is one of the larger businesses on AIM, has a long history, offers exposure to a niche growth sector and pays a nice dividend.

Family fortunes

Watkin Jones (LSE: WJG) can trace its roots back to a business founded by carpenter Huw Jones in 1791. Current chief executive Mark Watkin Jones is the ninth generation of the family to head the company. It’s now a leading UK developer and constructor of multi-occupancy properties, with a focus on student accommodation.

Descendents of the founding family and related parties sold shares at 100p at flotation, and then more shares at 140p in a recent placing, but still retain a significant stake in the business. Woodford participated in the placing, taking 26.1m shares for an outlay of £36.5m.

Still very buyable

Watkin Jones released maiden annual results as a listed company in January. These were in line with expectations and saw the board deliver on its dividend promise and point to a positive outlook for 2017.

You’ll have to pay a bit more than Woodford paid for his shares — they’re currently trading at 150p — but they still look very buyable to me at this level. Current-year forecasts give an undemanding P/E of 11.2, falling to just 9.9 for 2018, while the prospective dividend yield is 4.2%, rising to 4.4% for next year.

Unfortunate events

While Watkin Jones is a brand new investment for Woodford, FTSE 250 power generator Drax (LSE: DRX) is a long-time holding that he’s been pumping more cash into recently.

Drax has suffered a tough few years. In a particularly unfortunate turn of events, just as the company upgraded the UK’s biggest power station from coal to biomass, the government ended green energy subsidies.

Bright future

Despite its troubles of recent years, the future is looking brighter for Drax. Diversification, including through acquisitions, is expected to drive earnings rapidly higher.

With the shares trading at 328p — lower than Woodford paid when he bought last month — the current-year forecast P/E is 25.2 and the prospective dividend yield is 3%. This may not scream ‘value’ but the anticipated momentum of recovery next year brings the P/E down to a more reasonable 17.4, with the dividend yield rising to an attractive 4.7%. As such, I think now could be a good time to buy a slice of this business.

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.