These 2 dividend stocks are ridiculously cheap

These two companies may offer upside potential as well as strong income returns.

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It’s somewhat surprising to still find a number of dividend stocks which trade on low valuations. After all, inflation is already at 2.9% and is forecast to move higher over the medium term. This could mean that investors will begin to prioritise dividend yields which exceed inflation, since they will offer a real-terms income return.

This situation, though, does not yet appear to have taken place. Evidence of this can be seen in the low valuations of a number of high-yielding shares. Here are two examples which could be worth buying now for the long term.

Change of direction

Reporting on Tuesday was real estate investment trust (REIT) British Land (LSE: BLND). It announced a £300m share buyback programme for the current financial year. It has decided to engage in such a programme because it feels valuations are excessive and that acquiring new assets may not be the most efficient usage of capital. Therefore, while its shares trade on a relatively low valuation, it has decided to utilise a share buyback programme in order to improve shareholder returns.

Of course, the outlook for the UK commercial property market remains uncertain. Brexit has caused sterling to weaken and inflation to rise, which has knocked confidence in the wider economy. Therefore, it would be unsurprising for companies which are UK-focused to experience a difficult period from a financial perspective.

Despite this, British Land reports a robust trading environment at the present time. Furthermore, its shares are trading on a price-to-book (P/B) ratio of just 0.7, which suggests there is significant upside potential on offer. It also has a dividend yield of 4.9% which is covered 1.2 times by profit. This indicates that it could offer sustainable growth in shareholder payouts, which could make it a strong dividend share in the long run.

Growth potential

Also offering impressive income, growth and value appeal at the present time is logistics and support services company John Menzies (LSE: MNZS). It is expected to report double-digit growth following last year’s turnaround performance which saw its bottom line rise for the first time in over four years.

The company’s forecast earnings growth rate of 14% this year and 13% next year, however, has not pushed its shares onto a high valuation. John Menzies trades on a price-to-earnings growth (PEG) ratio of just 0.9, which suggests that it has considerable capital growth potential. Certainly, there is scope for a downgrade to its outlook, but with such a wide margin of safety it appears to be a worthwhile buy right now.

As well as this, it offers dividend growth potential. The company may yield only 2.9% at the present time, but with dividend payments covered 2.8 times by profit this could mean shareholder payouts grow at an even faster pace than profit over the medium term. The end result could be a strong income stock in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of British Land Co. 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.

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