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£5k to invest? 2 dividend stocks I’d buy (and one I’d avoid)

If you’ve got cash to invest and are looking for safe and profitable long-term opportunities, then I think it pays to avoid the latest ‘hot stocks’. Popular shares are often fully priced for good news, leaving no margin of error for disappointment.

I prefer to focus on good companies where the share price already reflects a cautious outlook. Today I want to look at two stocks where I think short-term headwinds have created a buying opportunity. I also want to consider one high-yield stock that I’m avoiding following recent news.

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A household name going cheap?

My first pick has been in business for 135 years and has not cut its dividend for at least 31 years. Consumer goods firm PZ Cussons (LSE: PZC) is best known for brands such as Carex, Imperial Leather, St Tropez and Original Source.

The firm has been hit by tough trading conditions in its core UK and Nigerian markets over the last year or so. In the UK, for example, customers are trading down to cheaper own-brand products in areas such as hand washing. Despite this, PZ Cussons’ brands have managed to gain share in a number of markets.

The firm’s shares are now trading at levels last seen in 2009. I think that’s probably too cheap for a good quality, defensive business that has historically generated attractive shareholder returns. In my view, the stock looks reasonably priced on 16 times earnings, with a 4.3% dividend yield. I’ve added PZ Cussons to my buy list.

202 years of technology

Continuing today’s theme of UK businesses with long, successful track records, my next pick is chemicals and engineering group Johnson Matthey (LSE: JMAT).

Today, this firm is best known for producing catalytic converters for motor vehicles. But it’s been in business for 202 years. In my view, this demonstrates an impressive ability to evolve and adapt its business to changing technology.

As you might expect, the firm’s focus is on sustainable technologies. In addition to its core clean air business, it’s also involved in battery technology, specialist recycling and even pharmaceuticals, through its chemistry operations.

The JMAT share price is down by more than 30% from the £38 peak seen in 2018.

One reason for this is slowing new car growth in many global markets. That’s a short-term headwind. Over the long term, I think the shares look good value, trading on 12 times forecast earnings with a dividend yield of around 3.4%.

I’m avoiding this 6.6% yield

Last week, housebuilder Crest Nicholson Holdings (LSE: CRST) published its latest accounts. In my view, the numbers were pretty poor. The number of homes completed fell by 4%. Pre-tax profit fell by 39% to £103m. Forward sales are 22% lower than at the same time last year. And profit margins have slumped.

The only thing that stayed the same was the dividend, which was left untouched at 33p per share. This gives the shares a tempting 6.6% yield, but in my view it relies on new CEO Peter Truscott delivering a strong turnaround.

Mr Truscott does have a strong track record and I think he should be able to fix many of the group’s problems. However, he faces uncertain market conditions, rising labour costs and the end of the profit-boosting Help To Buy scheme.

Crest’s 6.6% yield may seem tempting. But in my view, now isn’t the right time to be buying housebuilders, especially troubled ones.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of PZ Cussons. 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.