The Motley Fool

Two ways to invest in dividends with only £2,000

Investing for income on a limited budget isn’t easy. It’s tempting to go for the highest dividend yields you can find in order to feel that you’re getting a worthwhile return.

But this approach can be risky — yields of more than about 6% often indicate that problems may lie ahead. Today I’m looking at two dividend stocks with attractive yields that are well supported by earnings. Does either of these companies deserve my buy rating?

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...

Recent falls could make this a buy

Shares in floorcovering distributor Headlam Group (LSE: HEAD) fell by 7% in early trade this morning. A solid set of 2017 results were overshadowed by news that January trading fell below expectations.

This group buys products such as carpets, tiles and laminates from suppliers in 16 countries, and sells through a network of 63 fully-owned distribution businesses in the UK and Europe.

Like-for-like sales fell by 5.9% in January, thanks to a weaker performance in the residential sector and “a reduction in orders from one of our larger customers”. This trend continued in February when is sales performance was said to be “similar” to January.

Despite this, the company has left its 2018 guidance unchanged. It’s still early in the year and management believes that its strategy of improving profitability and making selective acquisitions means forecasts for this year are still valid.

My view

Headlam’s sales rose by 2% to £707.8m last year, while underlying pre-tax profit rose 7.3% to £43.1m. The board took advantage of improved cash generation to increase the dividend by 10% to 24.8p, giving a trailing yield of more than 5%.

The firm’s focus on increasing its profit margins seems to be paying off, but it’s worth noting that like-for-like sales in the UK only rose by 0.5% last year.

Although the group also operates in Europe, the UK accounted for 97% of operating profit last year, so falling sales here are a concern.

Analysts expect the group’s adjusted earnings to rise by around 15% to 45.1p per share this year. This puts the stock on a forecast P/E of 11 with a prospective dividend yield of 5.5%. I suspect these forecasts will be cut following today’s results so I’d probably rate the shares as a hold until the outlook becomes clearer.

A cash machine with a 6.8% yield

Sofa and carpets retailer SCS Group (LSE: SCS) is a well-known sight on retail parks across the UK. It’s a cyclical business that’s dependent on consumer spending and affordable credit for growth.

When times are good — as they have been — SCS performs very well. The group’s net profit has risen from £2.6m in 2013 to £9.4m in 2017. Trading so far this year has been solid.

In January, the firm reported like-for-like order growth of 2.2% for the six months to 27 January. However, analysts expect profit growth to be broadly flat this year, suggesting that profit margins may be coming under pressure.

The stock’s valuation is undemanding, on just 9.5 times forecast earnings. Profits have been backed up by strong cash generation in recent years, and a dividend of 14.9p per share is forecast for this year, giving a prospective yield of 6.7%.

If you believe the UK economy is likely to remain healthy, SCS could be a rewarding buy.

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...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

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.

Our 6 'Best Buys Now' Shares

The renowned 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 enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.