While a high dividend yield can be an attractive quality to look out for in any company, a number of income stocks offer much more than just a high yield. In many cases, a high dividend yield indicates that investor sentiment may be weak, in which case it could lead to scope for improving levels of capital growth.
Similarly, a generous dividend can indicate that a company’s management team is upbeat about its future prospects. This can mean improving shareholder payouts in future, as well as the prospect of lower risk for investors.
With that in mind, here are two FTSE 250 shares which seem to offer high yields, as well as strong total return potential in the long run.
Construction companies are relatively unpopular at the present time. Uncertainty surrounding the outlook for the UK economy as well as fears regarding the outlook for the housing market have caused stocks such as Kier Group (LSE: KIE) to be awarded low ratings by the stock market. The company, for example, trades on a price-to-earnings (P/E) ratio of around 10, which suggests that it has a wide margin of safety.
Its intrinsic value may be much higher than its current market price because it is forecast to deliver strong earnings growth over the medium term. For example, in the next two years the company is due to generate net profit growth of 10% per annum, which puts it on a price-to-earnings growth (PEG) ratio of just 1.
Additionally, Kier has a dividend yield of around 7% from a shareholder payout that is covered 1.7 times by profit. This suggests that dividends are highly sustainable at their current level, and they could move significantly higher without hurting the financial standing of the business. As such, the stock could offer high total returns, as well as an enticing risk/reward ratio.
Also relatively unpopular at the present time are retail stocks such as Dixons Carphone (LSE: DC). While there are exceptions, many retailers are finding the current trading conditions in the UK to be difficult. Consumer confidence is at a relatively low ebb, with inflation being ahead of wage growth over the last year. This has caused consumers to delay spending on big-ticket items such as mobile phones, which has hurt the company’s performance.
Looking ahead, Dixons Carphone is expected to report a fall in earnings of 25% in the current financial year. However, investors appear to have factored-in its falling bottom line, with it trading on a P/E ratio of 10 at the present time. Since its earnings are due to return to modest growth over the next two financial years, it could offer turnaround potential over the medium term.
With a dividend yield of almost 6% from a payout that is covered 2.2 times by profit, the company appears to offer a potent mix of income and value investment potential.
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Peter Stephens 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.