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Two cheap income stocks yielding 5% I’d buy for an ISA

If you are looking for income stocks to add to your ISA, I strongly think you should consider pub groups Greene King (LSE: GNK) and Marstons (LSE: MARS) today. 

For a start, at the time of writing, shares in both of these companies look undervalued. Indeed, shares in Greene King are currently dealing at a forward P/E of just 10.5 and shares in Marstons are changing hands for only 7.2 times forward earnings. On top of these attractive valuations, both stocks support market-beating dividend yields. Greene King yields 5%, and Marstons 7.4% at the time of writing. 

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These low valuations suggest the market isn’t as optimistic about the future for these two companies as I am. So I’m going to outline why I believe these two pubcos could be attractive acquisitions for your ISA portfolio. 

Growing concerns 

The most commonly cited reason as to why these are bad investments is the number of pubs closing across the UK. According to official figures, more than 25% of UK pubs have closed since 2001 and, currently, they’re closing at a rate of 18 a week as people avoid going out to eat and drink. 

Falling sales, coupled with rising costs are creating the perfect storm for pub owners. However, despite the trends affecting the broader pub industry, both Greene King and Marstons seem to be navigating the hostile environment quite successfully. 

For example, at the beginning of January, Greene King reported its most prosperous Christmas Day sales ever of £7.7m across the group. Overall, like-for-like sales for the 36 weeks to 6 January 2019 increased 3.2% and sales over the two-week Christmas and New Year period jumped 10.9% year-on-year. 

As well as growing sales, the company is also being proactive in reorganising its pub estate, selling off underperforming buildings and opening new ones, only in the areas where it sees the most opportunity for growth. For the 2019 financial year, the business plans to close 100-110 pubs, but only open nine. Management is also targeting up to £20m of cost savings for the year. 

Marstons reported a similarly positive trading performance over the Christmas period. At the end of January, the company told its investors that for the 16 weeks to 19 March, group like-for-like sales ticked higher by 1.4%, with a 5.7% jump over the Christmas fortnight. 

Beating the market 

These positive trading updates seem to indicate Marstons and Greene King are doing just fine, despite what the headlines might suggest. 

Of course, there’s always the risk that in the event of a bad Brexit, consumer spending could collapse, which would have a significant impact on these two brands. However, the current level of valuation for both businesses suggest to me that there’s already plenty of bad news baked into the share prices. 

To put it another way, I think these two firms offer attractive dividend yields with limited downside risk making them the perfect income investments for a Stocks and Shares ISA.

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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.