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2 growing dividend stocks I’d buy to top up my state pension

I don’t want to rely on the State Pension in my old age. I live fairly frugally, but even I don’t fancy the idea of trying to stay comfortable on the £8,500 per year or so that I’m set to get.

So I’m building up my SIPP, and I’m mainly looking for progressive dividends. And if I can find strong earning growth prospects too, that’s a bonus.

Hidden growth?

I think I’m seeing exactly that at Macfarlane Group (LSE: MACF), whose shares have lost 25% of their value since the end of June. I don’t see a good reason for the fall, other than general retail malaise afflicting the packaging materials supplier.

There’s net debt on the books, but at the halfway stage at 30 June, it stood at a modest £11.1m, down £3.6m since December 2017 and “well within its existing bank facility.” The firm’s pension scheme deficit was continuing to fall too, down to £9.4m, from £11.8m six months previously. For a company with a first-half pre-tax profit of £3.5m, I’m not unduly concerned by either of those at the moment — but we do need to keep an eye on them.

In an update Tuesday, chairman Stuart Paterson said the firm’s “performance in the second half of 2018 has continued to reflect the good progress demonstrated in the first half,” adding that he’s confident of meeting full-year expectations.

Sales for the year to date have grown by 13%, fuelled to a significant extent by acquisitions. And these days, when sector valuations are low, really make me like a company that can keep its acquisitions going. But even without that, organic sales growth stands at 5%.

Pre-tax profit is “well above the corresponding period in 2017,” which bodes well for forecasts of a 33% EPS rise this year. Add in progressive dividends set to yield around 2.6%, and P/E valuations of 11 to 12, I’ve put Macfarlane on my SIPP shortlist.

Oversold cash cow?

John Menzies (LSE: MNZS) is another that I think the market has mis-priced, with its shares down 25% so far this year.

I see two drivers behind that, one being the predicted EPS fall of 34% this year. But there’s a +14% reversal on the cards for 2019, which would put the shares on an undemanding P/E of 11.5. Add a forecast dividend yield of 4.2% to the mix and I’m seeing a bargain. The dividend has been a bit erratic over the past few years, but a chance to get in when the depressed share price has pushed the yield up looks good to me.

The other issue is net debt, which stood at £231.8m at the interim stage at 30 June, or 2.1 times EBITDA. I see that as too high, though the company is targeting “between 1.5 and 2.0 times EBITDA.” If it can get it down into that range I’ll feel more comfortable. And Tuesday’s trading update said that “debt continues to track to forecast and we expect the year-end position to be in line with our expectations.”

Overall, the firm reckons it’s trading ahead of last year and should meet expectations for the current year. And looking further ahead, Menzies sounds confident that it will meet its annual revenue growth target of 8%.

I have reservations, but the company’s prospects do make me think the shares are oversold.

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Alan Oscroft 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.