The Motley Fool

These two cheap dividend stocks look like buys to me

Amino Technologies (LSE: AMO) has all the hallmarks of a top dividend stock. The company is highly cash generative, has no debt and has a record of returning all extra cash to investors. These are highly desirable qualities for any business, but are especially important for dividend stocks.

Today’s trading update from the company for the six months ended 31 May shows just how much of a cash cow Amino is. During the period the company generated revenue of approximately £40m, up 21% year-on-year. Net cash the end of the period was £13.1m, up from £3.1m at the end of the same period a year ago and up from £6.2m at the end of November 2016. With a market capitalisation of £142m at the time of writing, this means around 10% of Amino’s market value is cash.

Dividend policy

Its cash generation and strong sheet gives it room to pursue an aggressive dividend policy. Over the past five years, the payout has risen 100% as earnings per share have grown by 150%. The dividend is covered twice by earnings per share, and this headroom means management has scope to increase the payout this year despite the fact that City analysts are projecting flat earnings growth. Amino’s per-share payout is expected to rise by a little more than 10% this year to 6.7p giving a dividend yield of 3.2%. The shares currently trade at a forward P/E of 15.2, so the shares are not particularly cheap although if you strip out the 20p per share in cash, the valuation falls to around 13 times forward earnings.

Special dividend?

Acal (LSE: ACL) is another company that has all the hallmarks of a top dividend play. Today the company announced its full-year results for the year ended 31 March 2017 showing strong growth across the board. Earnings per share rose 13% to 19.2p as underlying profit before tax rocketed higher to £17.2m, up from £14.5m in the year-ago period. Revenue grew by 18% or 6% at constant exchange rates. The best performing metric was the group’s cash flow. Cash flow from operations increased 66% from £16.3m to £27.1m and the group’s cash balance at the end of the period hit £22m, up from £20m at the end of the last fiscal year. This cash balance gives the company more than enough headroom to maintain its current dividend payout of 8.6p per share, which is costing around £5.2m per annum.

Unfortunately, this kind of dividend security does not come cheap. Like Amino, shares in Acal trade at a relatively high forward earnings multiple of 15 times, but City analysts have pencilled-in earnings per share growth of 14% for the year ending 31 March 2018, so the high multiple is to some extent justified by growth. The shares support a dividend yield of 3%, and the payout is expected to grow by around 5% per annum for the foreseeable future. With such a healthy balance sheet I wouldn’t rule out special dividends along the way as well.

Dividends: The fastest way to a million

Dividends are essential for building wealth over the long term and could more than double your returns through the miracle of compounding over time. Therefore, dividends can significantly increase your chances of being able to retire early.

And if early retirement is your goal, the Motley Fool is here to help. Our analysts have recently put together this brand new free report titled The Foolish Guide To Financial Independence, which is packed full of wealth-creating tips. The report is entirely free and available for download today

So if you’re interested in achieving financial independence, click here to download the free report today. What have you got to lose?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.