Generating a second income from the stock market is relatively straightforward… if you can find the right stocks to include in your portfolio. And with that in mind, I’m highlighting two companies I believe meet all of the criteria for buy-and-forget income stocks.
Fat profits
PayPoint (LSE: PAY) is one of the most profitable businesses in the FTSE 250. For its 2019 financial year, the group reported an operating profit margin of 26%, compared to the market median of 7.6%. This healthy margin means the company is swimming in cash. Indeed, at the end of its last financial year, the firm reported net cash on the balance sheet of £38m.
I don’t expect this trend to come to an end anytime soon as PayPoint is one of the largest payment processors in the UK. The company manages transactions for clients and then skims a small percentage off each deal. It’s a highly scalable business model and, as PayPoint’s profit margins indicate, profitable.
As the country continues to transition away from a cash-based economy towards electronic payments, demand for PayPoint’s services should only increase. Its business model is the primary reason why I think its shares can help you generate a second income. The other reason is management has adopted a policy of returning as much free cash as possible to shareholders.
For its current 2020 financial year, City analysts believe the company will distribute a total of 83p per share to investors, giving a dividend yield of 9.5% on the current share price. Current City estimates indicate a yield of 8.8% for 2021 as well.
However, despite this market-beating dividend yield, the stock still trades at a relatively attractive forward P/E of just 13.4. In my opinion, this undemanding undervalues the business and its cash generation.
Transition phase
The other FTSE 250 dividend stock I think has the potential to give you a second income is oil and gas services group John Wood (LSE: WG). Shares in this business have been a poor investment since the beginning of 2017, with the stock price having fallen by more than 60% since January of that year.
It’s easy to see why investors have been selling their interests in the company, as net income has consistently declined every year since 2014. But it looks as if things are about to change.
Last year, John Wood acquired peer Amec Foster Wheeler, which nearly doubled group revenues. However, 2018 was somewhat of a transition year, and the benefits of the acquisition didn’t shine through.
The City thinks this will change in 2019. Analysts have pencilled in a net profit of $326m for the year, up 78% from last year. On top of this, they’re forecasting a per share dividend payout of $0.36, giving a yield of 8.3% on the current share price.
It looks as if John Wood is well on the way to meeting these forecasts. Pre-tax profit increased by 25% in the first half, which means the company is on track to hit full-year targets according to management.
All in all, if you’re looking for an undervalued industry giant that has the potential to provide you with a second income, I’d consider John Wood today.