If you have cash sitting in your Stocks and Shares ISA, I’d recommend buying a company with dividends – that way you can earn income for owning a small part of that company. On top of that, over time the share price is likely to rise as well, giving you the double benefit of income from dividends and growth.
Bounce-back opportunity
AG Barr (LSE: BAG) – the maker of Irn-Bru – is one such dividend-paying company. It doesn’t have the biggest dividend on the FTSE 250, but that’s kind of the point. What it does have is potential to grow the dividend year-on-year, rather than have to cut a dividend that has become too burdensome, like Royal Mail and SSE have had to do.
The yield is 2.8% based on the current share price, however, earnings covered the payout by 2x. It’s therefore highly unlikely that the dividend is in danger of being cut, even if the company’s last update to the market wasn’t the most positive. What that does mean though is that the share price is at its lowest for two years, which pushed down the P/E ratio so the shares are seen as better value.
The fall came about because the company revealed a profit warning. It said that the sugar levy and poor weather meant volumes were lower. As a result, it now expects revenue for the 26 weeks to 27 July to have dropped around 10% from the previous year to £123m, with profit for the full year expected to decline by as much as 20% on the year.
Overall though, I still rate the shares a buy. The beverages company owns strong brands, especially Irn-Bru, it’s family-run, which means shareholders are usually looked after better, and its products are sold globally to repeat customers. I think this is a good recipe for ongoing success, despite the recent blips.
The solid builder
Housebuilder Barratt Developments (LSE: BDEV) complements the beverage company well. It’s a more natural choice for those chasing high yields. It has a dividend yield of 4.2% and it’s cheap as well with a P/E below nine.
That’s because, like all its peers, it’s being hit by investor fears around housebuilding generally as a result of Brexit/economic concerns and the less favourable buy-to-let environment.
Recent results were a mixed picture, showing a number of positives but also some issues that may be problematic if they continue. The firm, in its full-year results, revealed it had sold 17,856 homes, which pushed up operating profit to £901.1m. Margins also improved significantly from 17.7% to 18.9% because of higher-margin land purchasing, as well as the continued focus on more efficient house types.
The downside was that revenue fell slightly as did average selling prices. If that continues it’ll be a concern, but for now, there’s no reason to think it will. It’s a reflection of the group focusing less on London. Overall, I think the company is in good shape and could be a great way to get income from dividends.