Finding companies which offer a mix of high dividend yields and low valuations is never easy. That task has been made more difficult in recent months, however, by the rise in the rate of inflation. It now stands at 2.9%, and this means that investors are becoming more positive on the investment potential of higher-yielding shares as they seek to generate an income return which is higher than inflation.
Alongside this, the FTSE 100 continues to trade close to an all-time high. This means there may be fewer dirt-cheap stocks around. However, while that may be the case, here are two companies which appear to offer a potent mix of high yields and low valuations.
Reporting on Friday was real estate investment trust (REIT) Impact Healthcare (LSE: IHR). The company owns a diversified portfolio of healthcare real estate opportunities, particularly residential care homes. It has acquired 57 care homes since its IPO in March 2017, with an average net initial yield of 7.6%.
Encouragingly, the portfolio has been 100% let and is income-producing. This has meant that the company’s dividend was fully covered against its adjusted earnings in its most recent reporting period. With it on track to pay out 4.5p in the three quarters to 31 December, it has an annualised dividend yield of around 5.8%. This is twice the current rate of inflation and means that the trust may become more popular among income-hungry investors.
With a net asset value per share of 100p, Impact Healthcare appears to offer excellent value for money. It has a price-to-book (P/B) ratio of just over 1, which indicates that it may offer capital growth potential in the long run. With it being a relatively stable and resilient business model, it could also provide defensive characteristics at a time when the outlook for the UK economy is highly uncertain.
Also offering a mix of a high yield and low valuation is developer and operator of student property Unite Group (LSE: UTG). It has a strong growth opportunity due to the pressure on housing supply in the UK. While a large number of students are international postgraduate students, they are unlikely to be affected by Brexit as they often stay for one year or less. Therefore, demand for student accommodation could remain buoyant and lead to higher rents across the sector.
With a dividend yield of 3.3%, Unite Group offers an inflation-beating income return. Dividends are likely to rise over the medium term, since the company is forecast to grow its earnings by 7% in the current year and by a further 15% next year. Since it has a dividend coverage ratio of 1.3, shareholder payouts could rise by at least as much as profit growth. And with the company trading on a price-to-earnings growth (PEG) ratio of 1.2, it could offer significant capital growth potential.
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Peter Stephens does not own shares in any companies 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.