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Why I think these secret dividend stocks could help you avoid relying on the State Pension

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At just £125.95 a week, the basic State Pension is unlikely to make you feel flush in your golden years. One way of supplementing this amount is to put some of your savings to work in the stock market — specifically, stable income-generating stocks.

One company that ticks this box, in my opinion, is — somewhat ironically — XPS Pensions (LSE: XPS). With a market capitalisation of £340m, it’s hardly a minnow but I’d be surprised if it were currently appearing on many income investors’ radars.

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Formerly known as Xafinity, the Reading-based firm’s purchase of Punter Southall earlier in the year created the largest specialist pensions business in the UK. It currently advises over 1,200 schemes and administers pensions for over 800,000 people.

Today’s interim results for the six months ended 30 September contained few surprises, which is probably just what holders would hope for.

Revenue rose 113% to £52.2m supported by the integration of Punter Southall (which contributed £26.7m). Although operating profit plummeted from £4.2m to £100,000 due to charges relating to the deal, adjusted operating profit, which strips out these costs, rocketed 63% to £11.4m.

Away from the numbers, XPS stated that it had seen “good client retention” over the period in addition to a number of new annuity wins. Looking forward, it stated that a favourable market backdrop should allow the company to recapture revenue growth over the second half of its financial year. Management now expects full-year profit to be “broadly in line with expectations”.  

Changing hands for 16 times earnings, XPS is on the pricey side, but some of this can be justified by the fact that demand for its services is unlikely to dry up anytime soon. Indeed, co-CEO Paul Cuff commented today on the “significant growth opportunities” that lie ahead for the company as a result of “an increasingly positive regulatory background“. 

But XPS is, I think, a decent option for income seekers too. As well as hiking its half-year payout by 10% to 2.3p per share today, the business is forecast to return a total of 6.85p in the current financial year, equivalent to a yield of 4.2%. 

Plenty of character

Another company that arguably doesn’t generate much press, but I think is a great source of dividends, is small-cap toy designer, developer and distributor Character Group (LSE: CCT)

Despite the closure of Toys R Us hitting its performance in H1, today’s full-year results were cheered by the market as the company reported “comfortably achieving market expectations” and finishing the financial year “in a strong position“. Product ranges such as Peppa Pig and Teletubbies “remained in demand“, even though revenue and pre-tax profit at the £105m cap declined by 8% and 14% respectively over the year to the end of August. 

Encouragingly, Character stated that new financial year had started well and that it was “confident” on trading over Autumn and Winter which, of course, includes the particularly crucial festive period. As a further sign of this bullishness, the company raised its final dividend by 20% today, bringing the total cash return to 23p per share (a yield of 4.5% at the current share price of 513p).

With payouts comfortably covered by profits, not to mention a solid £15.6m net cash on the balance sheet, I wouldn’t be surprised if Character’s trend of raising dividends by double-digits over the last few years continues going forward.

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Paul Summers 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.

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