Two cheap dividend growth stocks that are outside the FTSE 100

Edward Sheldon looks at two dividend stocks outside the FTSE 100 (INDEXFTSE: UKX) that can be picked up at bargain valuations.

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Many investors often stick to the FTSE 100 when building a portfolio of dividend stocks. And that makes sense, to a degree, as many Footsie companies are stable, well managed, and with excellent dividend track records.

However, the FTSE 250 index, which contains the largest 250 stocks outside the FTSE 100, also contains a number of dividend stocks that have strong track records and may be worth considering for a dividend portfolio. Here’s a look at two that are trading cheaply right now.

Bellway

Over the last five years, housebuilder Bellway (LSE: BWY) has been a dividend growth investor’s dream. Not only has the company lifted its payout from 20p per share to 122p, but shareholders have also enjoyed fantastic capital gains, with Bellway’s share price rising from around 1,300p to 3,370p, a gain of 160%. Are there more gains to come?

A trading update for the period 1 February to 3 June, released this morning, suggests that there certainly could be. The group advised that market conditions remain stable, demand for new homes is strong and that, for the full year, it’s on target to complete the sale of over 10,000 homes for the first time in its history and achieve another record year of earnings. At 3 June, the company’s order book stood at 6,144 homes, growth of 7.8% on last year. Executive chairman John Watson commented: “This has been another successful trading period for Bellway, in which the demand for new build homes remained strong, enabling the Group to continue delivering its long term and sustainable strategy of increasing shareholder value through responsible volume growth.

While it’s important to note that housebuilding is a highly cyclical business, in the near term, the prospects for investors look good, in my view. For example, City analysts currently expect Bellway to increase its dividend payout by 13% this year to 138p per share, which equates to a prospective yield of 4.1% at the current share price. With the stock trading on a forward P/E of just 8.1, I think this housebuilder is certainly worth a closer look.

Greene King

Another FTSE 250 dividend stock trading at an extremely low valuation is pub operator Greene King (LSE: GNK). The shares have been quite unpopular for much of the last 48 months, however, sentiment looks to be slowly improving. And with the World Cup only two days away, I think now could be a good time to consider the stock for its big dividend.

It’s worth noting that despite the cyclical nature of the hospitality industry, Greene King has increased its dividend every year since 1997, which is a fantastic achievement. Last year, the group paid out 33.2p per share in dividends, which equates to a high yield of 5.3% at the current share price. While the company does have a fair chunk of debt on its balance sheet, the dividend looks sustainable in my view, as dividend coverage last year was healthy at a ratio of 2.1 times.

The shares have jumped around 30% since a mid-April trading update in which the company advised that Easter sales were strong and that the group is “well placed to deliver long-term value to shareholders.” Yet the stock can still be picked up on a forward P/E of under 10 right now. I think that valuation looks attractive.

However, if neither of these stocks appeals to you, feel free to take a look at the free report below for more dividend stock ideas. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Greene King. 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.

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