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Have £5k? These cheap FTSE 250 dividend stocks could make (or break) your ISA

If you’re an ISA investor hunting the Holy Grail of big income flows at low cost, then now is a great time to go shopping on the FTSE 250. There’s plenty of underpriced dividend shares to buy right now and Go-Ahead Group (LSE: GOG) is one that’s attracted my attention following recent share price weakness.

The bus and train operator didn’t please the market last month when it announced that pre-tax profits dived by more than a third during the 12 months to June. This drop, though, was owing to the loss of the London Midland rail franchise in late 2017.

In fact, I would argue that Go-Ahead Group’s earnings outlook is pretty robust, as steps to bolster its core business pay off and it expands its transport operations in foreign markets. Last year alone it won four new major contracts and began trading in Ireland, Norway, and Australia.

At current prices Go-Ahead carries a forward price-to-earnings (P/E) ratio of just 12.2 times and a corresponding dividend yield of 5.1%. This makes it a great buy right now.

Not so tasty

At first glance there’s also plenty to like about The Restaurant Group (LSE: RTN) from a pure value perspective. Current forecasts leave it dealing on a forward P/E ratio of 11.7 times and packing a 4.3% corresponding dividend yield.

But scratch a little deeper and suddenly it becomes obvious why the restauranteur is so cheap. City analysts expect another painful earnings drop in 2019 (by 17%), a forecast that when married up with the company’s giant debt pile leads to expectations of another dividend cut.

The tough economic landscape and its position in the ultra-competitive middle tier of the market aren’t the only reasons to avoid The Restaurant Group today, though. I’m also worried about the fact the bulk of its eateries are located in or around retail parks and how the number of hungry customers popping through its doors is thus likely to be impacted by the growing popularity of online shopping.

British Retail Consortium data today showed that visitor numbers to physical stores in the UK has slumped 10% in just seven years. And judging by the rate at which retailers continue to ramp up their investment in e-commerce the decline is only going to worsen, which is a worrying omen for the Frankie & Benny’s owner.

A brilliant bet

I‘d much rather use any spare pounds I have left over to buy GVC Holdings (LSE: GVC).

Like The Restaurant Group, this FTSE 250 firm also offers plenty of appeal from a cost perspective. The gambling operator sports a forward P/E multiple of 13.2 times and a bulging 4.2% dividend yield for 2019. But while earnings are also expected to sink here more immediately – an 18% bottom-line drop is anticipated by the City, reflecting recent regulatory changes affecting fixed-offs betting terminals in the UK – GVC’s long-term outlook remains nothing short of exceptional.

The online gambling industry continues to grow at a breakneck pace and, as a consequence, GVC saw net gaming revenues via the internet soar 12% in the third quarter. This was particularly impressive given that the comparative period a year earlier included the FIFA World Cup. And through aggressive global expansion GVC is putting itself in the box seat to ride this trend in the years ahead.

 

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended GVC Holdings. 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.