Looking for extra passive income, I have been scanning the stock market. Can I find dividend shares to buy now for my portfolio that look attractively priced? I think there are such shares and outline the case for a couple of contenders below.
Legal & General
The financial services provider Legal & General (LSE: LGEN) is the first of the two picks I would consider for my portfolio.
I think its business benefits from attractive long-term economics. A year, a decade, or even longer from now, millions of people will still want to insure their homes and vehicles, or invest some of their savings. To target that robust future customer demand, Legal & General has a significant competitive advantage due to its well-established brand. That should help it attract and retain customers, as well as potentially cross-sell them into other products from its range.
The business is a money-making machine and last year, profit after tax rose to £2bn. Given that the company’s revenues were £10.4bn, that means the post-tax profit margin was an impressive 19.7%.
High income potential
Such strong financial performance adds up to good news for shareholders. Currently the Legal & General dividend yield is 6.7%. On top of that, the company has set out plans to increase its dividend in coming years.
Dividends are never guaranteed, however, and there are risks here. An increase in storm damage could push up claim costs, hurting profits. The financial services market is also highly competitive, which could threaten profit margins.
In terms of valuation, the firm trades on a price-to-earnings ratio of eight. I reckon that is a bargain valuation for a company with the long-term growth rates, asset base, and proven business model of this famous firm.
Synthomer
The second share I would consider is aqueous polymers specialist Synthomer (LSE: SYNT). The company’s latest annual dividend means that it is currently offering an eye-watering yield of 9.8%. The 30p per share dividend was comfortably covered by basic earnings per share that came in at 75.2p.
With its strong position in an important part of many commercial production chains, Synthomer has been doing well thanks to strong demand. I am concerned, though, that cost inflation could damage profit margins over the next couple of years. Additionally, Nitrile latex demand is now subdued after previous stockpiling of items such as medical gloves. That could lead to revenues falling.
Shares to buy now for my portfolio
But I see such ups and downs of the demand cycle as an inevitable part of life for a basic materials producer like Synthomer. In the long term I expect demand for its products to remain substantial. That should help support profits.
The dividend jump last year reflected a pandemic-era demand surge. So I do not expect such a high payout in future. The company called the dividend raise an “exceptional increase reflecting the unique year of profitability”. But I still hope the company can still pay attractive dividends in future, even if at a lower level.
The price-to-earnings ratio is currently around seven. That valuation looks cheap to me, although if earnings fall next year the prospective P/E ratio would be higher. From a buy and hold perspective, I would be happy to add these shares to my portfolio.