There are many routes to riches in the market. One of the more ‘relaxed’ methods is to buy and sit on stocks paying big dividends. If these stakes can be purchased at a low price, all the better.
Today, I’ve picked out two lesser-known dividend champions that, in addition to handing out cash to shareholders, still look great value.
Great dividend stock
Online trading provider CMC Markets (LSE: CMCX) has had a superb last year or so with volatile markets bringing a lot of new clients to its services. Net operating income was 63% higher over the 12 months to the end of March to £409.8m. Pre-tax profit rocketed 127% to £224m.
Despite this, the shares look cheap considering CMC’s consistently high margins and returns on capital. They currently change hands for just 13 times forecast earnings.
Naturally, there will come a time when markets settle. Indeed, CMC has noted that “client trading activity has moderated from prior elevated levels” since the start of its new financial year. This may bring out a few sellers. The shares have climbed almost 400% over the last two years, after all.
Then again, the company’s rapidly growing stockbroking arm should help make up for this. A forecast 3.8% yield easily covered by profits also makes this a great dividend stock, in my opinion.
Despite the risk of ‘buying at the top’, I’d feel comfortable adding this stock to my own portfolio now.
Ice cool income
Shares in asset manager Polar Capital (LSE: POLR) also look great value considering the mix of potential growth and income on offer.
Right now, these can be bought for 14 times forecast earnings. That looks a good deal based on fundamentals and recent trading. At the start of the month, Polar reported a 49% jump in pre-tax profit to £75.9m over the year to the end of March. A record 71% rise in Assets under Management (AuM) to just under £21bn was also announced.
However, the PEG (price/earnings to growth) comes in at 1. According to the celebrated investor Jim Slater, anything around this level or lower suggests investors are getting a lot of bang for their buck.
Obviously, there’s no sure thing. The POLR share price could quickly lose its momentum if global markets experience another big wobble and investors take flight. Whether this is the result of a Covid variant really taking hold or some ‘unknown unknown’, we can’t say. CMC might welcome more volatility. Polar Capital, less so.
Then again, the dividends should make up for any short-term pain. The shares currently yield 4.7%. So, like CMC, I’d be a buyer today.
Receive, reinvest, repeat
Cheap dividend stocks can be appealing for older investors who want to generate income. However, we know that feeding these payouts back into the market has the potential to really grow a person’s wealth, whatever their age.
One risk is that I might not stick to this approach. Spending dividends means missing out on the benefits that compounding brings over time. If this were the case, I’d give serious consideration to asking my broker to automatically reinvest on my behalf.
As last year showed, this income is never entirely secure either. The pandemic forced many firms to slash their payouts to shore up cash. As such, spreading my money around a few dividend stocks is something I wouldn’t hesitate to do.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Polar Capital 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.