Investing in dividend stocks isn’t a one-size-fits-all process. One very common dilemma is how to strike the best balance between yield and growth.
Today I’m looking at two companies with extreme positions. One offers an 8% yield, but shows little sign of growth. The other has a low yield but is expected to increase its payout by 50% in 2018 and 2019.
Start small, grow big
PCF Group (LSE: PCF) is a company you may not have heard of. This £63m specialist bank offers savings accounts and provides finance for cars, plant and other machinery.
The company gained a banking licence in 2016, enabling it to offering savings products to retail customers. This was a milestone, as retail deposits are a much cheaper source of funding than wholesale debt. PCF can now make more profit from lending, allowing it to expand more quickly.
Strong growth
In a trading statement issued today, the firm revealed that since launching its savings accounts in July 2017, it has collected £81m of retail deposits. It’s now in the process of retiring some of its wholesale debt and replacing it with retail deposits.
Lending is also growing rapidly. New loans rose by 93% to £54.5m during the five months to 28 February, compared to the same period last year. PCF’s total loan portfolio has now grown to £172m, and the bank is targeting £350m by September 2020.
Lending quality seems good — impairments were just 0.5% last year. Return on equity fell to 8.7% last year due to heavy investment, but management’s medium-term target of 12.5% seems reasonable and attractive to me.
A dividend grower?
PCF isn’t without risk, as lending on vehicles and machinery can suffer high default rates in a recession.
The stock’s forecast P/E of 12 looks affordable, but at 1%, the dividend yield is low. However, this forecast payout is covered 6 times by forecast earnings and is expected to rise by 50% next year. I see this as a potential long-term dividend growth buy.
An 8% yield today
If you’re looking for dividend stocks that can pay you a high yield right now, PCF may not suit. But my second stock, PayPoint (LSE: PAY), might be of interest.
This company is best known for its network of payment processing terminals in convenience stores. These allow customers to pay a wide range of bills with cash, card or by mobile. PayPoint operates a similar business in Romania.
It’s very profitable, with a five-year average operating margin of almost 20%. A long period of strong growth between 2012 and 2017 saw the group double its profits and build up a £53m net cash pile.
In 2017, PayPoint completed the sale of services it considered non-core, as they weren’t connected to its retail network. The firm is now gradually returning surplus cash to shareholders while focusing on its core business.
Analysts expect the Hertfordshire firm to deliver earnings of 61.6p per share this year, with ordinary and special dividends totalling 69p. This leaves the stock on a forecast yield of 8.6%, with an underlying ordinary yield of about 5.6%.
Like-for-like revenue rose by 3.6% during the first quarter and the outlook for earnings seems stable. I rate this as a dividend buy and recently added the shares to my own portfolio.