For those of us seeking a regular, hands-free income, dividend stocks are incredibly appealing. However, not all dividend stocks are created equal as some high yielding companies do not look as secure as their dividends suggest.
So, here are two income stocks with dividend yields of 4% or more that should be able to continue to return chunks of cash to investors for many years to come.
BCA Market (LSE: BCA) might not be a household name, but it’s more than likely you have heard of the company’s flagship We Buy Any Car Brand.
Since changing its name from Haversham Holdings plc, BCA has consolidated its position in the vehicle re-marketing business both here in the UK and overseas. In many ways, the company has almost no competitors in this market, so over the past five years growth has exploded. Since its IPO at the end of 2014, it has surged from a loss to a net profit of £41m for 2017. City analysts have pencilled in a net profit figure of £85m for 2018. The business is going from strength to strength.
With profits surging, and its virtual monopoly over the vehicle re-marketing market in the UK, it was only a matter of time before the company attracted takeover interest. And today we’ve had confirmation that private equity firm Apax Partners is now running its rule over the business.
Following rumours that emerged over the weekend, according to a press release issued today, Apax offered 200p to buy BCA at the beginning of May. This initial deal was rejected, and so far, there have been no further approaches.
It is rare for investors not to welcome a takeover offer at a premium to the prevailing market price, but in this case, I believe BCA has more potential as an independent business — as the recent price action in the stock shows.
Shares in the firm are currently changing hands at just under 230p, 15% above Apax’s offer price. Clearly, the market believes the company is worth more, something I agree with.
According to City figures, BCA’s earnings per share are expected to leap 114% for 2018, followed by growth of 11.2% for 2019. Based on these figures, shares in the company are trading at a forward P/E of 18 for 2019, which may look expensive, although considering its growth history, in my view, it won’t be long before the stock grows into this multiple.
What’s more, the dividend is set to grow in line with earnings per share, rising to 4.1% by 2019. The distribution is covered 1.4 times by earnings per share.
With BCA’s earnings set to surge and buyers circling, it certainly looks to me as if this is one income stock that’s worth a place in any income portfolio.
Beating the market
Staying in the automotive sector, another income play that has recently caught my eye is Marshall Motor Holdings (LSE: MMH). This is a traditional car dealership business. The company sells vehicles through franchise agreements with vehicle manufacturers.
Last year the company reported revenue growth of 19.5%, or 3.5% after stripping out the positive impact of newly acquired sites during the year. Set against the backdrop of falling new car sales (sales fell 6.2% for the UK market as a whole), this performance is highly impressive. The bulk of the growth came from its used car division. Here sales grew 7% for the year (compared to a market decline of 1.1%) with after-sales revenue (the firm’s most profitable line of business) rising 2.3%.
The City believes its strong performance compared to the rest of the car market will continue throughout 2018. At the beginning of the year, the UK Society of Motor Manufacturers and Traders was forecasting a decline of 5.6% for the UK new car market in 2018. Despite this forecast, analysts believe the company can chalk up earnings growth of 15% in 2018 as it doubles down on the used and after-sales market.
Management has also taken action to reinforce Marshall’s balance sheet by selling the group’s leasing division for just under £50m. The sale enabled the enterprise to materially reduce net debt from £119m to £2m at the end of fiscal 2017, giving the company more flexibility to handle market weakness and, more crucially, support its dividend.
The shares currently support a dividend yield of 4%, and the payout is covered 3.5 times by earnings per share. As well as this market-beating dividend yield, the stock trades at a discount valuation of only seven times forward earnings.
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Rupert Hargreaves owns no share 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.