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Why this 7% yield might be worth considering for your portfolio

Shares of small-cap womenswear retailer Bonmarche Holdings (LSE: BON) rose by 10% on Monday morning after the group issued an encouraging set of interim results.

Sales rose by 5% to £97.8m, thanks to like-for-like sales growth of 4.3%. Much of this was driven by an increase in online sales, which rose by 38.6%. In-store like-for-like sales rose by a more modest 1.6%.

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The group’s pre-tax profit for the first half was £4.2m, more than double the £2m reported for the same period last year. This improved performance lifted the group’s operating margin to 4.3%, compared to 2.2% last year.

H1 earnings rose from 3.1p to 6.8p per share, providing a significantly improved level of cover for the interim dividend of 2.5p per share.

The right time to buy?

This niche retailer has lost nearly 70% of its value over the last two years. Difficult trading conditions have hit profits and left the group facing a difficult turnaround. However, today’s half-year figures suggest to me that chief executive Helen Connolly’s strategy to modernise the group may be succeeding.

I’m particularly impressed by cash generation, which remains strong. Today’s interim figures showed a net cash balance of £14.9m at the end of September. That’s equivalent to almost one-third of the company’s market cap.

The latest broker consensus forecasts suggest that Bonmarche will deliver earnings of 12.7p per share this year and a dividend of 7.2p per share. This gives the stock a forecast P/E of 8 and a prospective yield of 7%.

In my opinion, these forecasts look credible after today’s results. Given the stock’s cash backing, I’m tempted to take a closer look at this share for my own portfolio.

A proven winner

Despite my optimism, an investment in Bonmarche isn’t without risk. I’d only consider this stock as part of a diversified portfolio.

One potential partner for this small-cap turnaround is FTSE 250 food-to-go retailer Greggs (LSE: GRG). The firm’s move into the coffee and café market has proved very successful, and helped to drive sales growth of 8.6% during the 13 weeks to 30 September.

A quality buy?

Greggs’ food and drink may not be everyone’s first choice. But the group’s financial ratios suggest to me that it’s a high quality business.

Return on capital employed — a useful measure of profitability — was 25% last year. That’s well above the 15% level I use as a benchmark to identify businesses with above-average profitability. The group also has a strong balance sheet and has maintained a net cash position for a number of years.

I’m in no doubt about the quality of this business. The question is how much it’s worth paying for the shares. The group’s adjusted earnings are expected to be broadly flat at 62.7p per share this year, while the dividend payout is expected to climb 4.5% to 32.4p per share.

These forecasts place the stock on a forecast P/E of 21.5, with a prospective yield of 2.4%. Although this may seem pricey, it’s worth noting that growth is expected to accelerate next year. Analysts are pencilling in earnings growth of 7% and dividend growth of around 12%.

In my view, Greggs could still be a profitable buy if you’re looking for a mix of income and growth.

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Roland Head has no position in any of the 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.

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