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Why this 7% dividend stock could be a better buy than Next

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The Next (LSE: NXT) share price has risen by more than 60% from last summer’s low of 3,565p. This impressive recovery has come as investors have gained confidence in the fashion retailer’s ability to adapt and profit from the shift to online sales.

At under £36, I thought Next shares were a bargain. I’ll review the stock’s current valuation shortly, but first I want to consider a stock which I believe is one of today’s top dividend buys.

I’ve just bought this 7% yielder

One company I’ve recently added to my own portfolio is payment services company PayPoint (LSE: PAY). As with Next, investors have some doubt about the long-term outlook for this group, which operates a network of payment terminals in convenience stores throughout the UK and Romania.

The main focus of this business historically has been cash payments for domestic bills. But as cash payments decline in the UK, PayPoint is increasing its focus on areas such as card payments and electronic point of sale systems — computerised tills, of the kind used by big retailers.

The group’s other area of growth is Collect+, its parcel collection and drop-off business. Collect+ is the largest network of its kind in the UK, with more than 7,400 sites. Several parcel firms now use the network and management hope to add at least one more contract before Christmas.

The numbers look good to me

PayPoint’s share price rose by up to 4% this morning after the group said that revenue from continuing operations climbed 5% to £213.5m last year, while continuing operating profit rose by 0.4% to £53.5m.

Clearly there’s a lack of growth. But the opportunities identified by the company seem realistic to me. And, in the meantime, this remains a highly profitable and cash-generative business.

Today’s results show that PayPoint generated an operating margin of 25% last year, with a return on capital employed of 86%. Those are impressive figures. Although earnings of 63p per share aren’t enough to cover the total dividend payout of 82.5p per share, this payout is covered by free cash flow and the group’s net cash balance.

Chief executive Dominic Taylor expects to report a rise in pre-tax profit this year.

Meanwhile, the group’s strong cash generation and debt-free balance sheet give me confident that its generous dividend policy will be maintained.

With the shares trading on 15 times forecast earnings and offering a forecast yield of 7.7%, I may add more to my portfolio.

Is Next still a buy?

High street fashion retailer Next generated about 60% of its profits online last year. The group reported digital sales of £1.9bn and related profits of £461m, giving a profit margin of 24%. That’s impressive by any standards. But it’s also much higher than online-only retailer ASOS, which only made an operating profit of £79.6m, on £1.9bn of sales last year.

Next’s stores are less profitable than its website. But management have laid out clear plans to downsize or close the store network if necessary. In the meantime, it’s taking advantage of a weak market for retail property and working to secure big rent reductions on existing stores.

Following recent gains, Next shares now trade on a forecast P/E of 13 with a prospective yield of about 2.9%. I think the shares are still worth considering at this level.

Buy-And-Hold Investing

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Roland Head owns shares of PayPoint. The Motley Fool UK owns shares of and has recommended ASOS. 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.