The Motley Fool

2 dirt-cheap dividend stocks that could make you brilliantly rich

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Sometimes you’ve just got to be patient with stocks. After drifting lower all summer, shares of educational software and services group RM (LSE: RM) rose by 15% in the opening hour of trading this morning.

The group now says its full-year results should be “ahead of expectations”. Although management hasn’t see fit to provide any figures for guidance, I’d expect this to mean that earnings are likely to be 5%-10% higher than consensus forecasts.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

If that’s the case, then RM could report adjusted earnings of about 20p per share this year. At the last-seen price of 185p, that would still leave the stock on a modest forecast P/E of 9.3.

Should you rush in and buy?

RM’s last move higher came in February, when it announced the acquisition of Connect Group‘s educational business. This £56.5m deal was quite significant for the group, as the Connect business appeared to have the potential to add around 40% to full-year sales.

The integration of this business appears to be going well. RM said today that expected cost savings are likely to be greater than the £2m originally expected. Trading is also said to have been solid across the group’s other businesses.

Looking ahead

Analysts expect earnings to rise to 21.5p per share in 2018/19, as the full benefits of the Connect acquisition flow through to the bottom line. This puts RM stock on a modest forecast P/E of 8.6, with a prospective dividend yield of 4.4%. I’d continue to rate this stock as an income buy following today’s news.

A 7% yield I trust

A dividend yield of 7.9% without full earnings cover would normally be a cause for alarm, signalling a likely dividend cut. But before dismissing companies with high yields, it’s often work taking a look at the figures.

Just occasionally, these generous payouts can be affordable. In my view, payment processing group PayPoint (LSE: PAY) is a good example of this.

The firm’s recent half-year results showed that profits remained stable during the first half, despite a slight fall in revenue. Underlying operating profit was broadly flat at £24.4m, while operating cash flow — crucial to dividends — rose by 5.3% to £29.5m.

This business has always generated a lot of surplus cash, and these figures suggest to me that this attraction remains.

Although the group’s forecast full-year dividend of 71.4p per share isn’t covered by expected earnings of 62p per share, I expect most of this payout to be covered by free cash flow. The remainder will be funded from the group’s net cash balance of £27.6m, which is gradually being returned to shareholders.

A pure income buy?

The outlook for growth here looks limited. But PayPoint handles a wide range of payments through its corner shop terminals, and in my view this business is likely to have a stable future.

The stock currently offers a forecast yield of 7.8%, rising to 8% for the 2018/19 financial year. As the group’s cash balance falls, these payouts may eventually be cut so that they’re covered by earnings. But even then, I’d expect a yield of around 5%.

I believe this stock has the potential to deliver a 20% cash return in three years. I’d rate the shares as an income buy.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head owns shares of RM. The Motley Fool UK owns shares of PayPoint. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.