Buy-to-let bother

The Treasury’s tax crackdown combined with tough new regulations on renting out properties makes it more of a faff than ever. As things now stand, I reckon the buy-to-let dream is dead.

Personally, I would rather gain exposure by investing directly in housebuilding stocks. You can buy and sell them in seconds, instead of months, and take all your returns entirely free of tax inside an ISA. Also, you can invest much smaller sums.

That’s not to say housebuilders have given investors an easy ride. For example, FTSE 100-listed Taylor Wimpey (LSE: TW) trades 18% lower than three years ago, even though it has rallied 20% in the last six months.

Telford time

London-focused residential property developer Telford Homes (LSE: TEF) has just reported its full-year results to 31 March and is down 4% despite posting a 12% jump in total revenue to £354.3m.

It has made a “strategic shift towards build to rent developments,” which are less risky and capital intensive, but also have lower margins. This reduced total profit before tax to £40.1m, down from £46m in 2018.

Build and they will rent

Telford has entered into strategic build-to-rent partnerships with Invesco and M&G Real Estate to speed growth in the sector and expects to develop significant pipelines in the coming years. It currently has a development pipeline of 4,900 homes, up from 4,000 last year, with a total gross development value of £1.59bn, up from £1.31bn.

Today, the £220m group proposed a final dividend of 8.5p per share, with the total dividend matching last year’s at 17p. The forecast yield is juicy at 5.6%, with cover of 1.9. Gearing has been cut from 52.5% to 37%. 

With City analysts forecasting a 28% drop in earnings over the next 12 months, I’d advise caution. But the current valuation of 10.6 times earnings is certainly tempting.

Taylor-made

With a market-cap of £5.5bn, Taylor Wimpey is a much larger beast. It’s trading at an even lower valuation of just 8.5 times forward earnings, which reflects concerns about the sector. One worry is the future of the Help to Buy scheme, which underpinned more than half of all newbuild purchases in 2018 and, in some areas, as much as 97%.

Effectively, it’s a Government top-up for the housebuilders. But that ends in 2021 for all but first-time buyers, and altogether from 2023. Endless Brexit uncertainty will also add to investor worries.

Made to order

However, the Taylor Wimpey stock is on the up as the company made a strong start to its new financial year, with strong sales and a healthy order book, which currently stands at £2.40bn, up from £2.16bn in 2018.

The group currently has a forecast yield of a mind-boggling 10.7%, although cover is thin at 1.2. Years of double-digit earnings growth looks set to slow, but they should still climb 2% in 2020.

Housebuilding stocks are risky as UK politics enters unknown territory. But with today’s yields and valuations, I’d pick them over buy-to-let every time.

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Harvey Jones 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.

Whether or not you share my bearish opinion, I would encourage you to consider looking closely at these two dividend heroes before the FTSE 100 bank. They even carry bigger forward yields than the 5.6% Lloyds currently offers.

Safe as houses

Despite the stream of cracking trading releases still coming from across the housebuilding spectrum, the Telford Homes (LSE: TEF) share price has failed to gain the traction of its peers.

It’s not a surprise to see the AIM-quoted firm continue to struggle, even though low forward P/E ratio of 8.6 times gives it plenty for bargain hunters to get stuck into. Meanwhile its gigantic 6.1% dividend yield makes it one of the biggest-paying builders out there.

Telford has been the victim of slowing demand more recently, reflecting its strong bias towards the struggling London market. Problems here caused it to shave £10m off its full-year profits forecasts for the period to March 2019 in late February. And it’s possible things could remain difficult through the remainder of the current fiscal year, at least.

Having said that, I would argue long-term investors should consider capitalising on the 40%-plus slide in Telford’s share price over the past 12 months.

In response to its recent troubles, the business has vowed to redouble its efforts in the fast-growing build-to-rent market, a segment which is expected to represent 50% of the company’s development pipeline by the close of the calendar year.

In particular, Telford’s focus on the capital bodes particularly well as rental levels boom. Business campaigning group London First predicts by 2025, some 40% of all households in London will live in the private rented sector, versus 28% as of a few years ago.

Fancy some yields above 7%?

There’s plenty of upside for Telford’s profits to grow once confidence in the London property market improves. But if you’re not convinced, why not take a look at International Personal Finance (LSE: IPF) instead?

Unlike the housebuilding giant, IPF sources no profits from these shores and is, instead, geared primarily towards Central and Eastern European nations such as Poland, Hungary and Czechia. The prospect of runaway economic growth in these emerging nations isn’t the only reason to expect the financial giant’s bottom line to thrive, either, because of the success of its push into the fast-growing digital credit market (credit issued at its IPF Division unit soared 33% in the first quarter).

Currently, IPF sports bigger yields than Telford (and Lloyds for that matter), the business yielding an enormous 7.6% for the current fiscal period. It also trades on a dirt-cheap forward P/E ratio of 5.8 times. For those seeking big dividends on a budget, it’s a pretty terrific stock to buy, in my opinion.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

The FTSE 250 is packed with similarly-stunning dividend stocks that could prove highly lucrative in the medium term and long after. But right now I wish to stay close to Britvic and look at AG Barr (LSE: BAG), another big player in soft drinks.

It’s already proven its mettle as a profits grower even in the toughest of trading conditions. Indeed, even as pressure on consumer spending power has grown and fresh challenges like the UK-implemented sugar tax have reared their head, Barr’s bottom line continues to swell.

Latest trading details in September underlined the company’s resilience, as revenues rose 5.5% in the six months to July, to £136.9m, and underlying pre-tax profits improved to the tune of 4%, to £18.2m.

A high Barr

The greatest weapon in Barr’s arsenal is the terrific customer loyalty that its labels like Irn Bru, Rubicon and Strathmore command. And what a weapon these brands have proven to be — Scotland’s beloved Irn Bru has been a favourite with the thirsty since the turn of the 20th century.

And the company has stepped up investment in innovating, expanding and marketing these sales-driving brands to keep them flying off the shelves. Its ‘Street Drinks’ range under the Rubicon umbrella is the latest to hit the market in recent months.

So it’s no surprise, not in my book at least, to see City analysts predicting that the long record of profits growth is set to continue. Rises of 3% and 5% are forecast for the years to January 2019 and 2020 respectively, meaning that its role as a great dividend booster should remain intact.

Last year’s 15.55p per share payout is predicted to rise to 16p in the current period, and again to 17p in fiscal 2020. There are bigger yields out there than Barr’s, which sit at 2.1% and 2.2% for this year and next respectively, but the capacity for prolonged dividend growth stretching many years into the future still makes it a brilliant share to snap up today, I believe.

Check out this ~6% yielder

Telford Homes (LSE: TEF) is another FTSE 250 dividend hero I’d like to bring to your attention.

The spectacular resilience of the housebuilders has been on display for more than a year now — despite the collapse in broad homebuyer appetite these stocks continue to deliver profits growth. Existing homeowners might be staying put but activity amongst first-time buyers remains healthy, helped by a combination of favourable lending conditions and Britain’s homes shortage.

I’m not expecting this supply/demand imbalance to be solved until many years into the future, if at all, and I’m expecting earnings to keep growing at Telford for one.

City analysts agree — they are predicting profits improvements of 2% and 5% in the years to March 2019 and 2020 respectively, for example, and this lays the base for them to expect dividends to keep rising as well.

Last year’s 17p per share payment is predicted to rise to 17.7p this year and to 18.3p in the following period, resulting in staggering 5.7% and 5.9% yields for these respective years. If you’re looking for a rock-solid, big-yielding stock to buy today, Telford is worth serious consideration today, in my opinion.

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

In my view, it makes more sense to invest in listed companies with exposure to the property market. Today, I’m looking at two small-cap dividend stocks that fit this description.

Build-to-rent could be big

AIM-listed Telford Homes (LSE: TEF) believes purpose-built rental housing will be “a significant part of the London market” in the future. The company expects this trend could extend to other parts of the UK as well.

If chief executive Jon Di-Stefano is right, his company is well positioned. Telford has shifted its focus towards built-to-rent housing over the last three years. The firm is now in the process of delivering more than 1,750 homes in London.

Group sales rose by 31% to £129.6m during the first half of the year, while pre-tax profit was 16.1% higher at £10.1m. This highlights a fall in profit margins, which is to be expected — bulk-buying landlords are able to secure cheaper prices than individual buyers.

The company says that because build-to-rent projects are often pre-funded by the eventual owners, lower margins are acceptable. I can accept this — the group’s return on capital employed was an impressive 20% over the 12 months to 30 September, unchanged from the 2017/18 financial year.

What could go wrong?

My only concern with today’s half-year figures is that Telford’s business still seems to be sucking up a lot of cash. Net debt rose from £103.1m to £122.7m over the six months to 30 September. That represents 52% of net assets.

Although this level of borrowing should be manageable, I can’t think of another house-builder with such a high level of gearing.

Telford shares look cheap, trading at 1x net asset value and on a forecast price/earnings ratio of 5.5. The forecast dividend yield of 6.3% is well covered by earnings. But the group’s falling margins and rising debt don’t appeal to me, given the uncertain outlook for the UK economy.

Telford could be a profitable buy. But for me the risks are too high.

Here’s one I would buy

In contrast, US company Somero Enterprises (LSE: SOM) has made good use of a long boom in commercial property to build up its financial strength.

This firm — which makes equipment used to produce perfectly flat concrete floors for warehouses and factories — went into the financial crisis with too much debt. It’s since repaired its balance sheet and now maintains a net cash balance of at least $15m to ensure the business is safe during the next downturn.

This conservative approach hasn’t stopped the company delivering impressive levels of growth and shareholder returns. Revenue is expected to reach $90m this year, double the level reported in 2013. Return on capital employed in 2017 was a stunning 52%.

Looking ahead, Somero trades on 10.8 times 2018 forecast earnings, with a dividend yield of 5.8%. Although the business is exposed to the risk of a slowdown in its core US market, I think this firm looks good value at current levels. I rate the shares as a buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

That was the opening to the introduction from Telford Homes (LSE: TEF) on Wednesday, setting the scene for the company’s trading update ahead of its first-half results due on 28 November.

The firm’s comments address more than the London scene. I see them as indicative of the general malaise that’s afflicting the house-building industry in general after a spectacular decade of recovery-led growth.

Profit growth

But even with that caution, Telford reckons its first-half profit is set to “exceed the £8.7m achieved in the six months to 30 September 2017.” And on that front, the firm proposes to increase its dividend once again — and we’re looking at a nearly thrice-covered forecast yield of 4.7% for this year. Telford’s dividend is below the sector average, but it’s more strongly covered than most.

There’s some change in the mix, with Telford pursuing the build-to-rent market of late, and the firm seems to be near the forefront of building partnerships in an area that I think will prove fruitful over the long term.

And people are shunning Telford shares on a forward P/E of only a little over seven, with EPS growth expected? And those dividends? I still don’t understand the madness of crowds.

The biggest

On the same thinking, how can shares in one of the UK’s biggest listed house-builders, Taylor Wimpey (LSE: TW), be trading on a forward P/E multiple of only a little higher at 7.8?

We’ve seen a steady fall in the Taylor Wimpey share price since the start of 2018, with a loss of more than 20% so far — against a FTSE 100 drop of just 6.3%. The trend is clearly against house-building stocks, and I think that’s a mistake. In fact, I see it as an example of what commonly happens when a cyclical sector goes out of fashion.

Now, there are genuine reasons for concern when it comes to Brexit, and the very strong recovery in the house-building sector is surely over. But in my view, the boom was just a reaction to a serious undervaluation of the sector, and I now see it as a solid long-term investment.

Cash generation

If you want big dividends from the FTSE 100, you’re not going to find anything higher than Taylor Wimpey right now, with a forecast yield of a massive 9.3%. Admittedly, that includes a big wedge of special dividends, but a company that has a lot of surplus capital to return to shareholders doesn’t look to me like one to shun.

At its interim stage, Taylor Wimpey’s chief executive Pete Redfern spoke of positive employment prospects and strong demand for homes, saying that the company is “confident in our prospects for the remainder of the year and looking further ahead.”

For me, house-building is an undervalued sector, offering solid income prospects.

The post Here’s why I think the Taylor Wimpey share price is still a top bargain appeared first on The Motley Fool UK.

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Alan Oscroft 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.

When people discuss dividend stocks, they tend to think only of big blue chip names. Many investors simply don’t associated small-cap stocks with dividends. But with a great deal of smaller companies punching above their weight on the income front, now may be the right time to consider small-cap dividend stocks for their attractive yields.

Telford Homes

Housebuilders are big dividend payers, with the sector offering an average prospective dividend yield in excess of 7%. Large-caps in the sector tend to offer more income, but many of the smaller rivals have stronger dividend cover and better growth prospects.

One small-cap housebuilder which particularly stands out to me is Telford Homes (LSE: TEF). Amid a slowing housing market, the London-focused residential property developer is bucking the trend.

The company’s financial performance is going from strength to strength. Last year, Telford’s pre-tax profits increased 35% to £46m, well in excess of original market expectations. Meanwhile, revenues increased to a record high of £316.2m, while the company reported a strong improvement in adjusted operating margin of 3.3 percentage points, up to 16.7%.

Growth

Looking ahead, management reckons Telford is well placed to deliver pre-tax profits exceeding £50m for the year to 31 March 2019, representing a 100% increase over four years. With such confidence, Telford raised its dividends for the full year to 17p a share, giving its shares a current yield of 4.1%.

Although the current yield pales in comparison to its sector peers, there’s considerably more potential for dividend growth with the company. Not only is its payout ratio significantly smaller than its rivals — at just over a third of its earnings, but future earnings are currently forecast to climb faster.

Build to rent

Moreover, Telford’s meaningful and growing exposure to the nascent build-to-rent market means its earnings ability should be less volatile than that of its sector peers. On build-to-rent contracts, the company benefits from forward funding, which reduces the amount of its own equity used during construction, enabling it to earn a much higher return on capital.

Although this comes at the cost of lower gross margins, due to savings in selling expenses and interest costs, greater exposure to the build-to-rent market should help it to weather the slowing housing market better than many of its rivals.

Shoe Zone

Elsewhere, I reckon Shoe Zone (LSE: SHOE) is another small-cap dividend stock to consider. At its current share price, the discount retailer offers income investors a prospective dividend yield of 6.2%.

Consumers may be abandoning the high street in favour of online shopping, but one area which is proving more resilient than most is the discount segment of the retail market. Keeping that in mind, shares in Shoe Zone, the UK’s leading value footwear retailer, have outperformed many of its sector peers with a gain 11% over the past 12 months, against the general retailer sector’s 8% dip.

Sure, the footwear retailer isn’t immune to structural issues affecting the sector — revenues have slipped for three consecutive years. But things appear to be stabilising, with revenues in the six months to 31 March growing by 1.1% to £73.7m. On the cost front, rents on renewals fell on average by 22%, giving it a full year saving of £100,000. And what’s more, with the balance sheet in a net cash position, Shoe Zone has the financial flexibility to maintain payouts for quite some time.

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Jack Tang 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.

In a recent article, I examined the income prospects of the builders currently populating the FTSE 100 and concluded that, with demand for new homes set to continue outstripping supply, that the likes of Barratt Developments and Taylor Wimpey will, in all likelihood, remain stable investment destinations in the years ahead.

The FTSE 250 isn’t exactly short of such attractive construction stocks, either. Take Telford Homes (LSE: TEF), for example. Its share price has fallen 12% over the past 10 weeks as the market has digested news concerning the state of the London market and considered what impact this will have on Telford.

I’m not so worried, however. While demand in the capital has indeed taken a whack in the wake of the 2016 European Union referendum, this has predominantly affected properties at higher price points. By contrast, Telford hasn’t really witnessed a significant demand falloff for its own newbuilds.

Indeed, Telford chief executive Jon Di-Stefano commented earlier this month that “the London housing market at our typical price point has remained robust, with ongoing demand from a broad base of customers.” Sure, it has to work that little bit harder to offload its properties at higher price points, but it said that its homes above £600,000 “continue to sell at a steady rate.”

Perky profit prospects

The chronic homes shortage in London and the surrounding areas isn’t the only reason I’m tipping Telford to continue creating strong profits growth.

The company’s sterling progress in the fast-growing build-to-rent sector also provides ample opportunities going forward, particularly as this segment of the housing market remains pretty underexplored in the UK compared with many countries in Europe and further afield. Di Stefano added earlier this month that “our activity in this burgeoning sector is helping to increase the scale of the business and will enable us to build on our substantial development pipeline of over 4,000 homes.”

Against this backcloth, City boffins are expecting the business to report an 11% earnings rise in the year to February 2019, and to follow this up with an additional 4% advance in fiscal 2020.

Clearly, these numbers aren’t heady enough to excite growth investors but they lay the foundation for dividends, which have already doubled over the last five years, to keep ripping higher. Last year’s 17p per share reward is anticipated to rise to 18.7p in the present period, before charging again to 19.3p next year.

As a consequence, yields for fiscal 2019 and 2020 stand at 4.5% and 4.7%, respectively.

The aforementioned share price weakness at Telford means that it now changes hands on a forward P/E ratio of just 7.4 times, some way inside the territory of 15 times that signals excellent value for money. At these levels, I believe the housebuilder is difficult to resist.

Stunning results

Hays (LSE: HAS) may be a little more expensive than Telford Homes, the recruitment specialist currently changing hands on a prospective P/E ratio of 16.2 times. While slightly toppy on paper, this valuation is not at all undemanding in my opinion given the FTSE 250 firm’s rising might across the globe.

Last time I covered Hays I said that the business could be a wise investment in the run-up to fourth-quarter trading details that were broadcast in mid-July. So it came to pass as the firm’s share price leapt to fresh record peaks of around 208p per share in the aftermath of the release.

The trading statement showed that like-for-like net fees grew 15% year-on-year between April and June, speeding up from the 10% increase printed in the prior three months. Hays’s recent update again highlighted the scintillating opportunities in its overseas markets. Net fees in its international businesses jumped 18% from the corresponding 2017 period, with growth hitting double-digit percentages in 24 of its 33 non-UK territories.

Against this backdrop, it’s no mystery as to why City brokers are therefore expecting earnings growth to have stepped up a level more recently. A 16% advance is predicted for the year ended June, and another 10% rise is forecasted for the period just started. Just like last year’s figure, I fully expect fiscal 2019’s estimate to be regularly upgraded as the year progresses.

Dividends set to keep climbing

But, as the title of this piece suggests, Hays isn’t just a great stock for growth investors to pile into. The rate at which profits are expected to keep expanding means that the number crunchers are expecting the special dividends to keep on coming. That means last year’s total payout of 7.47p per share is predicted to improve to 8.7p in the year just passed, and again to 9.9p for the current year. This means the jobs giant carries a large 5% yield.

Now, unlike Telford Homes, these dividend figures are not covered by anticipated earnings of 2 times or more. In fact, a figure of 1.2 times falls well short of the broadly-accepted security watermark. This is no worry to me, however, due to the company’s exceptional cash generation. The rate at which Hays is churning out the readies meant that it ended fiscal 2018 with £123m worth of net cash on the balance sheet, versus £5m a year earlier.

It’s no surprise that Hays is investing heavily to fully capitalise on this favourable trading backcloth, and particularly in the hot growth areas of France, Germany and the US. The company is one of the hottest growth and dividend prospects on the FTSE 250, in my opinion, and I’d be very happy to load up on the business right now.

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Royston Wild 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.

Despite this, I remain bullish over the housebuilders like Telford Homes (LSE: TEF).

For one, demand for properties continues to outstrip our meagre supply, and the government’s failure to STILL get to grips with this problem should keep the shortfall alive issue so the imbalance looks set to reign for many years yet. And second, dipping buyer confidence is exacerbating the shortage right now as existing homeowners put off upgrading and elect to wait things out before putting their properties on the market.

‘Affordable’ London homes undersupplied

This is playing into the hands of the new-build market and Telford itself noted in late May that revenues hit a record £316.2m in the 12 months to March 2018, up from £291.9m a year earlier. And the result prompted pre-tax profit to sprint to £46m, up 35% year-on-year and past the construction giant’s prior expectations.

The business commented on the “robust London market for housing at our typical price point with demand from a broad base of build-to-rent investors, individual investors, owner-occupiers and housing associations.”

Telford has a massive development pipeline of 4,000 to meet the undersupplied affordable housing segment in London, but this is not the only reason to expect profits to continue swelling. The firm is also doubling down on the build-to-rent segment, which chief executive Jon Di-Stefano expects will “drive the next phase of our growth.” He thinks that the business should “consistently” deliver full-year profit before tax of above £50m looking down the line.

Earnings and dividends to keep surging?

Last year’s strong bottom-line result prompted Telford to lift the full-year dividend 8% to 17p per share. And with further excellent earnings expansion predicted for the medium term — advances of 11% and 4% are forecast for fiscal 2019 and 2020 respectively — it should come as no surprise that dividends are expected to keep rising as well.

A reward of 18.7p per share is predicted for the current period, resulting in a chunky 4.7% yield. And the readout moves to 4.8% for the year after, thanks to the anticipated 19.3p dividend.

What’s more, investors can have confidence in these City projections being fulfilled. Current dividend targets are covered 3 times by predicted earnings through to the close of next year, well above the widely-regarded security terrain of 2 times or above. This should soothe any concerns over the impact of Telford’s rising net debt pile on future payouts. Its debt jumped to £103.1m as of March from £14.3m a year earlier as the company doubled-down on its growth strategy.

As if the prospect of jumbo dividend yields wasn’t enough, the firm also sports a dirt-cheap forward P/E ratio of 7.2 times. All things considered, in my opinion Telford is too good to pass up on today, and particular at these bargain basement prices.

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Royston Wild 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.

Construction time again

This morning the £345m AIM-listed builder published its final results for the year to 31 March and has dipped slightly despite a positive set of numbers. It posted record total revenue of £316.2m, up 8.3%, with total profit before tax exceeding original market expectations, increasing 35% to £46m. Margins rose also and the group said it is “well placed to exceed £50m of total pre-tax profit for the year to 31 March 2019, representing a 100% increase over four years”.

Telford has been helped by the “robust” London market, with recent price weakness mostly at the prime end, whereas its development pipeline prices average £539,000, a figure it expects to remain relatively constant in future. 

The days of double-digit house price growth may not return for some years, in my view, despite Bank of England timidity on hiking rates. This may cap share price growth although the forward pipeline looks healthy, despite London planning constraints and skills shortages.

Home front

Today, the board announced a proposed final dividend of 9p per share bringing its total dividend for the year to 17p, up 8% on 2017’s total 15.7p. Telford expects to pay at least one third of annual earnings in dividends and currently offers a forward yield of 4.1%, nicely covered 2.9 times. Earnings per share (EPS) are forecast to rise 15% in the current financial year, then another 5% the year after.

As my Foolish colleague Royston Wild has pointed out, Telford is cheap right now. It trades at a forecast 8.4 times earnings, which looks tempting given its progressive dividend policy.

X men

You might also want to consider another small-cap with outsize dividend prospects, digital marketing services group XLMedia (LSE: XLM), which my colleague Rupert Hargreaves recently said offered a strong long-term growth story. Over three years, the stock is up a healthy 170%, although it has retreated in recent weeks, falling 10% as growth forecasts slip.

XLMedia uses skills to generate high-value web traffic for customers, in return for a share in revenues or fixed fees. It specialises in the $32bn online gaming sector, running more than 2,000 content-rich websites designed to attract online gamers and direct them to around 150 partners across more than 20 countries. In April it edged into a more traditional form of gaming, buying bingo comparison site WhichBingo.co.uk for an undisclosed sum.

Bingo!

The group boasts strong operating margins of 29.6%, with little debt, and a stonking 109.3% return on capital employed. City analysts are expecting a dip in its growth profile this year, with EPS falling 1% as earnings drop 12%, although both are expected to recover strongly in 2019.

That’s a little disappointing, given that XLMedia currently trades at a forecast 16 times earnings. However, this £358m AIM-listed stock offers a healthy forecast yield of 3.5%, covered 1.9 times, and its long-term prospects remain promising… if you like a gamble.

The post 2 dividend-paying small-caps with monster growth potential appeared first on The Motley Fool UK.

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harveyj 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.

Regular readers of my investment pieces know that I remain pretty bullish over the profits potential of Britain’s housebuilding sector.

Telford Homes (LSE: TEF) is one share I am no stranger to tipping and back in February I highlighted the homes shortage that is driving demand for its new-build properties. And latest trading details from the AIM-quoted business underlined the favourable trading environment that is powering the company’s bottom line.

Telford’s share price swelled to three-year highs last week after it said it expected to print record revenue and profit for the 12 months to March 2018, and that a predicted 30% rise in pre-tax profit would come in above City expectations.

The builder commented that “the undersupplied housing market in London has remained robust at the group’s typical price point,” adding that it has been boosted by “a broad customer base of build-to-rent investors, individual investors, owner-occupiers and housing associations.”

Chunky yields

With the homes shortfall in the capital set to persist, I expect demand for Telford’s homes to remain resolute. And I am not alone as broker consensus suggests a 17% bottom line advance is on the cards for fiscal 2019. This makes Telford a brilliant value pick too — it sports a forward P/E ratio of 7.8 times as well as a corresponding sub-1 PEG multiple of 0.5.

City analysts expect profits to keep pounding higher as well, another 4% rise being predicted for next year. And these bubbly numbers give rise to expectations that Telford will continue to deliver robust dividend increases (it has already more than tripled the dividend over the five years to fiscal 2017).

An 18.9p per share reward is currently predicted for this year, up from an estimated 17p for last year, resulting in a meaty 4.3% yield. And the dial moves to 4.5% for next year thanks to the expected 19.7p dividend.

Fun in the sun

Elegant Hotels Group (LSE: EHG) is another London-quoted dividend great that is trading at bargain-basement prices right now.

The AIM-listed business is expected to roar back from recent profits reversals with a 14% advance in the year ending September, meaning it trades on a forward P/E ratio of just 10.1 times with a corresponding PEG reading of 0.8. Another 8% advance is forecast for next year, and I would bank on the company’s hotel refreshment programme and acquisition strategy in the Caribbean, as well as its moves to bolster bookings from the US, to lay the foundation for profits to keep moving higher.

At first glance there may not be much to celebrate for income investors, however, the vast cost of upgrading its resorts being predicted to result in a second successive dividend cut. Still, the 3.5p per share rewards forecast for both this year and next mean that the yield stands at a vast 4.2% through to the close of fiscal 2019. I think Elegant Hotels is a share that could provide exceptional returns now and in the years ahead.

The post 2 ultra-cheap dividend stocks you can buy right now appeared first on The Motley Fool UK.

More reading

• Don’t miss this once-in-a-decade opportunity to profit from the stock market’s AI hype
• £10,000 invested in easyJet shares on 1 April is now worth…
• Down 29%, should I buy Palantir for my Stocks and Shares ISA?
• Selling for £1, are Lloyds shares still a bargain?
• How much could spending just £5 a day on UK shares earn in passive income?

Royston Wild 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.