Pledge loans are loans that are secured against a customer’s high-worth possessions. And H&T saw its pledge loan book rocket to a record £84.2m as of June, up 74% year-on-year as the cost-of-living crisis worsened

Pawnbrokers face competition from financial services businesses like banks and doorstep lenders. But this business is thriving, and lending is now 40% above pre-pandemic levels.

Splendid all-round value

H&T’s share price has slumped in spite of its proven strength in tough times. As a keen dip-buyer, I think this represents a terrific buying opportunity.

In fact this AIM business offers exceptional bang for my buck at the current price around 330p. City forecasters think earnings at the firm will soar 109% in 2022 and rise an extra 27% next year.

Some large dividend increases are predicted as a result. Payouts of 14p and 18p are anticipated for 2022 and 2023, respectively, which produce fat yields of 4.4% and 5.5%.

Finally H&T trades on a forward price-to-earnings (P/E) ratio of just 10 times.

Another top dividend stock

I think buying some solid defence shares is a good idea for investors too. This isn’t just because government spending on weapons remains solid during all points of the economic cycle.

It’s also because arms expenditure is picking up as the geopolitical landscape deteriorates. Prime Minister Boris Johnson’s announcement on Friday that Britain’s defence spending will reach 2.5% of GDP by 2030 illustrates this line of thinking.

I’d buy Babcock International Group (LSE: BAB) shares right now to capitalise on these themes. The FTSE 250 firm sells a broad range of products and services over land, air and sea. These include everything from providing refuelling services for jets to manufacturing electrical systems for boats.

Payouts to return

I’d buy Babcock today, despite the threat of prolonged supply chain problems denting profits, and particularly because of the excellent value it offers at current prices around 318p per share.

City analysts think the firm’s earnings will soar 19% year-on-year the financial year to March 2023. And they believe annual profits will improve 20% next year as well.

These projections mean Babcock trades on a forward P/E multiple of just 9 times. They also mean the defence giant is tipped to grow the yearly dividend rapidly over the period.

Brokers think the business will pay a 9.8p per share dividend this year after stopping payments due to Covid-19. And they think the annual dividend will reach 14.7p next year. Consequently the yield leaps from a handy 3.1% to an impressive 4.6%.

I always aim to add to my portfolio during market corrections. Although it’s uncomfortable to see share prices falling so sharply, over the years these situations have created some of my best long-term buying opportunities.

A bargain retailer with a 7% yield?

The first company I’m interested in is sofa and carpet retailer SCS Group (LSE: SCS). This stock hit an all-time high of more than 300p in August last year, but has since fallen more than 40% to around 185p.

I’m surprised by the size of this fall. SCS has continued to trade well through the winter, even as life has returned to normal and travel and experience spending has increased.

In its latest update, SCS reported a 17% increase in orders for the six months to 29 January, compared to a year earlier. Helpfully, the company also included a comparison with the same period in pre-pandemic 2019/20. This showed new orders are now at the same level as they were before Covid-19 started to cause problems.

The main risks I can see at this time are rising prices and pressure on incomes that could cause people to cut back on home spending. As we head into the main holiday season, people might also be planning trips abroad rather than buying new sofas.

Even so, I think that SCS now looks too cheap for me to ignore. The latest guidance from the firm is that profits should be in line with expectations. That prices the shares on less than seven times 2021/22 forecast earnings, with a 6.9% dividend yield. I’m tempted to add this penny stock to my portfolio at this level.

A defensive business in uncertain times

One area where our shopping habits don’t change much in difficult times is the supermarket. My next pick, Finsbury Food (LSE: FIF), produces a wide range of bread and cakes for retailers across the UK.

Finsbury produces staple everyday items and affordable treats. In my view, shoppers are unlikely to ditch them from their shopping trolleys, even if prices rise slightly.

I think pricing power could be an important consideration over the coming months, unfortunately. The war in Ukraine has pushed up energy costs and commodity prices, notably wheat, which is a key ingredient for Finsbury.

Fortunately, I think Finsbury is in good shape to handle inflationary pressures. The company says it was able to pass on price increases during the second half of 2021. This is expected to result in higher profits in early 2022.

Although this improvement may now be smaller than originally hoped for, I think Finsbury’s share price already reflects this risk. The stock has fallen by nearly 20% since the start of the year, leaving the company trading on a modest eight times forecast earnings. There’s also a useful 3% dividend yield, which looks safe to me.

I already own Finsbury shares, but I’d be comfortable buying more at current levels.

A play on gold

The price of gold has risen 7% over the last month to more than $1,900 per ounce. Although I’m not generally a gold investor, I can see the attraction of owning the metal during uncertain times.

I’m thinking about adding some exposure to my portfolio by buying shares in pawnbroker H&T Group (LSE: HAT). H&T is exposed to the price of gold through jewellery retail and its scrap gold business, which operate alongside its core pawnbroking business.

One risk here is that H&T’s operations have quite a lot of moving parts. Profits from trading gold might rise, but other areas of the business may underperform. Even so, I think this company is well positioned to deliver an improved performance in 2022.

The company says that gold trading volumes improved during the final quarter of last year. Second-hand watch and jewellery sales “exceeded expectations” over the Christmas period, with retail sales in general now back to pre-pandemic levels.

Broker forecasts suggest H&T’s earnings will rise by as much as 50% this year, with further gains pencilled in for 2023. These estimates price its shares on nine times 2022 earnings, with a potential dividend yield of 4.4%. I’m tempted to buy a few for my portfolio.

A penny stock Peter Lynch would buy?

In his book ‘One Up on Wall Street’, famed US growth investor Peter Lynch advised investors to buy what you know. He pointed out examples of high street brands that had gone on to become huge successes, long after they appeared in his local neighbourhood.

I think this remains a useful tip today. One consumer stock I’m considering is discount retailer Shoe Zone (LSE: SHOE). This group sells through stores and online and is focused on the cheaper end of the footwear market.

Although Shoe Zone sells some branded names, the majority of its stock is made directly for the firm by contract manufacturers. This locks in attractive profit margins, despite Shoe Zone’s low pricing points. I’ve bought a few pairs of shoes from my local store and have no complaints, for the price.

I should point out that Shoe Zone survived a near-death experience early in the pandemic. The company’s online presence was lagging and a number of its stores became unprofitable.

One risk I can see is that the group’s recovery will hit a limit and that profits will come under pressure again from rising costs. I believe much of the firm’s stock is made in China so increased shipping costs and delays could cause problems.

However, so far, I think founders John and Anthony Smith have delivered an impressive turnaround. They’ve improved online performance, closed 50 unprofitable stores and updated others to more profitable formats.

Shoe Zone’s share price has doubled since October. The shares aren’t a screaming bargain anymore, but I still think they look good value. A price/earnings ratio of 12 doesn’t seem too high to me for a business that has been very profitable in the past. I’m tempted to start buying this penny stock for my portfolio.

Premier Miton

AIM-listed asset manager Premier Miton (LSE: PMI) is first up.

Thanks to some great performances from its funds, the firm has been attracting more investors. By the end of March, Premier had £12.6bn in assets under management. This compares favourably to the £9.1bn by this point in 2020. At £6.2m, pre-tax profit over the last interim period came in 17% higher. 

On dividends, Premier didn’t disappoint either. It recently hiked the interim payout by 48% to 3.7p per share. Such a jump is indicative of a very confident board. Right now, the small-cap’s shares have a chunky forecast yield of 5.2%. This payout is also safely covered 1.5 times by expected profits.

Although there can be no guarantees in the stock market (and Premier’s fortunes will be dictated by some things beyond its control), I think all this makes the company a good dividend pick. Taking into account its strong financial position, the shares are reasonably priced at 13 times earnings.

Gateley

Legal services firm Gateley (LSE: GTLY) looks to be another decent income stock from the small-cap world, in my opinion. 

In last week’s trading update, the business stated that trading had “continued to improve” over H2. It’s now predicting that full-year revenue will be at least £120m — up 9.3% on the previous year. Pre-tax profits will also be up at least 8.1% to £16m.

Analysts have the company returning 7.98p per share in dividends. That becomes a yield of 4% based on last Friday’s closing share price. Again, the payout looks likely to be sufficiently covered by profits (1.6 times). Like Premier, Gately has a reassuringly large net cash position (£20m). 

As far as drawbacks go, I do need to remember that Covid-19 could continue impacting companies offering professional services. It’s also worth mentioning that the free float (the number of shares available to buy on the market) is relatively low, making it a fairly illiquid stock. This can potentially lead to big increases in the share price. Sadly, the reverse is also possible. 

H&T

Pawnbroker, gold purchaser and jewellery retailer H&T (LSE: HAT) may not be everyone’s cup of tea, but I think it has good dividend credentials.

While only a prediction, analysts have it returning 7.46p per share in FY21. That gives the lowest yield of the three income stocks discussed here (2.7%). However, H&T also has the highest amount of dividend cover (2.6 times profits). Of course, the payout could end up being better if trading goes well over the rest of the year.

Clearly, H&T’s outlook is also dependent to some extent on what happens regarding Covid. Even though the firm provides “essential financial services” and has an online presence, it really needs high streets to remain open. Based on the success of the vaccination programme so far, I’m optimistic. Even so, Boris Johnson may still end up changing his road map in June. 

On a more positive note, a strong balance sheet suggests H&T is capable of weathering further storms. A rebounding gold price won’t do any harm either.  

Undervalued shares on offer 

I should start by saying that just because I believe these companies are undervalued, it does not mean they will generate positive returns.

Buying stocks at depressed prices can be a good investment strategy, but it is not suitable for all investors. However, I’m comfortable with the level of risk involved. That’s why I follow the strategy.

The first company on my list of undervalued shares is N Brown (LSE: BWNG).

Thanks to its online business, this fashion company is projected to escape the worst of the pandemic. According to City projections, net income totalled £27m in 2020 and could rise to £30m in 2021. These projections put the stock on a forward price-to-earnings (P/E) multiple of 7.6. I think that looks cheap compared to the market average of 16. Of course, analysts’ forecasts can change as events develop.

Some investors might believe this company is cheap for a reason. The fashion industry is incredibly competitive, and just because N Brown has survived until this point does not mean that it will continue to do so. 

Still, I think the stock’s valuation outweighs the risks of investing. That’s why I would buy it for my portfolio of undervalued shares. 

Recovery play

I would also buy shares in H&T (LSE: HAT) for my recovery portfolio of undervalued shares. 

The company, which offers a range of services such as gold purchasing, pawnbroking, personal loans, and retail shops, has experienced steady growth over the past five years.

Revenues declined last year as non-essential retailers were closed, but I think that could change as we advance. Indeed, the City is expecting revenues to return to near 2019 levels by 2022. These are just projections at this stage. 

Nevertheless, I’m encouraged by the company’s growth track record. It also entered the pandemic with a robust and debt-free balance sheet, which has enabled it to weather the storm. It will also provide financing for the group after the crisis to fund expansion. At the end of 2020, the firm had £35m of net cash to support its customer lending business and provide capital for reinvestment. 

The main risk the company faces today is the potential for a clampdown on its lending activities. A large number of high-interest lenders have collapsed over the past few years as regulators have taken a hard line with these businesses. H&T will not be immune to regulatory action. A sudden fall in the gold price may also reduce demand for its gold buying service. Profits at this service jumped 19.3% to £6.8m last year. 

Even after taking these challenges into account, I would buy the stock for my portfolio of undervalued shares. I believe it has great potential in the years ahead. 

Today’s full-year results report from H&T (LSE: HAT) contains good news for shareholders. The directors of the pawnbroking company increased the total dividend for 2020 by just under 81% to 8.5p per share.

It’s not all doom and gloom, though. I still believe there are many top stocks out there that should deliver decent returns even in these challenging times. H&T Group (LSE: HAT) is one quality UK share I’d happily add to my own Stocks and Shares ISA today.

A UK share for tough times

The twin problems of Covid-19 and Brexit pose significant threats to the domestic economy in 2021 and beyond. These are the sort of unfortunate conditions that play into the hands of counter-cyclical UK shares like H&T.

Data from the Financial Conduct Authority (FCA) shows that the number of citizens that have ‘low financial resilience’ — that means those with too much debt, low savings, or low or erratic earnings — has ballooned due to the Covid-19 crisis. The number of people in this category soared from 10.7m to 14.2m in 2020, the FCA says.

Companies like H&T become most profitable when the broader economic landscape is bleak. This particular UK share offers a broad range of services like pawnbroking, trading precious metals, and doling out loans. And in its most recent trading update last month it said that full-year profits for 2020 would be “ahead of market expectations” thanks to strong business in November and December.

On the flip side…

There is a risk that it might not be all plain sailing for H&T, however. Chief economist of the Bank of England, Andy Haldane, has just predicted a strong rebound for the British economy. With Covid-19 vaccines being rolled out he reckons that “a decisive corner is about to be turned for the economy… with enormous amounts of pent-up financial energy waiting to be released”. Such a scenario would likely have significant adverse effects on the pawnbroking sector.

City forecasts can change according to an improving or deteriorating trading landscape. But today the number crunchers reckon H&T’s earnings will dip 9% in 2021 before soaring 37% next year. This leaves the company trading on a low price-to-earnings (P/E) ratio of 12 times. And for me, a chunky 4% dividend yield puts an extra cherry on the cake.

I don’t think that H&T is just a great buy for the short-to-medium term, though. The business added an extra 70 stores to its estate in 2019 to take the total to 252. And it has described further investment in its online operations as “fundamental”. The UK share’s robust balance sheet (with no debt and a cash balance of £34m at the end of 2020) certainly gives it the resources to keep building for future growth.

Passive income generator

I’ve held a stake in kettle safety control supplier Strix (LSE: KETL) for some time now. I see no reason for this to change following Wednesday’s encouraging update on trading over 2020.

Yesterday, Strix stated it had seen “a marked recovery” in demand from July to December. This performance should see it deliver “modest” profit growth for the period. That’s pretty encouraging considering just how awful 2020 was for most businesses.

Of course, Strix’s small-cap status means its share price is likely to be more volatile than your typical FTSE 100 beast. As an investor with time on his side (I hope!), that doesn’t bother me. However, it might make the shares unsuitable for others with shorter time horizons. 

Positively, Strix appears to have started the year well. Talk of a “strong” order book for January and Q1 should help the company reduce debt even further and continue paying passive income to holders. As far as the latter’s concerned, a 7.7p per share total dividend becomes a trailing yield of 3.3%, based on today’s share price.  

Boring… but beautiful?

Another small-cap generating passive income for its holders is XPS Pensions (LSE: XPS). Analysts have estimated a 6.6p per share cash return in the current financial year (ending 31 March). Using today’s share price, this gives a chunky forecast yield of 5.5%. For perspective, the best I can get from a Cash ISA at the moment is a measly 0.55%! Trading at 12 times forecast earnings, XPS also looks very reasonably priced, in my opinion. 

Any downsides? Well, the likely share price performance is unlikely to quicken pulses soon. As the largest pensions consultancy in the UK, XPS will never attract the sort of attention that other stocks might. This being the case, I wonder if the biggest risk in buying XPS is the opportunity cost of not taking opportunities elsewhere. 

Still, if I was looking for a relatively mundane, uncyclical business that pays out cash to its owners without too much fuss, XPS surely ticks the box! 

Outperforming expectations

A final under-the-radar small-cap stock offering decent passive income is pawnbroker H&T (LSE: HAT). Benefiting from strong demand for jewellery, and the fact that most of its 253 stores could remain open, the company experienced “stronger than anticipated trading” in the final two months of 2020. This, H&T believes, will now lead it to outperform market expectations on profit for the full year.

Sure, some investors may be put off by the image of the industry in which H&T operates. The small matter of the company’s unsecured cash loans business being reviewed by the Financial Conduct Authority is an example of this.

For those comfortable with the ethics of this sector however, analysts currently have the company down to return 9.7p per share for 2020. That would equate to a 3.4% yield at the current share price. Factor in a £34m cash balance and no debt and I suspect cash payouts might rise again in 2021.

With that in mind, here are three income stocks that look attractive in the current environment for long-term investors.

Secure income stocks

Secure Income REIT (LSE: SIR) was designed with the single goal of providing a steady income stream for investors in all environments. The group’s portfolio comprises “critical operating assets let to strong businesses in defensive sectors with high barriers to entry.“

The 161 operating assets that make up the overall portfolio are let on leases with a weighted average lease term of 21 years, with no brakes. What’s more, the company is well funded. At the end of 2019, it had uncommitted cash on the balance sheet of £234m, with a net loan-to-value ratio of 31.9%.

All of the above suggests the company is well-positioned to weather the current uncertainty.

Some tenants might withhold income in the near term, which would have an impact on cash flows. But any outstanding dues should be settled over the next 12-24 months, especially considering the nature of Secure’s blue-chip portfolio.

Right now, the stock supports a dividend yield of 5.6%. It’s also trading at a price-to-book value of just 0.7. That’s why this business makes it onto my list of the top three income stocks to buy in April.

Healthcare properties

Healthcare-focused real estate investment trust Target Healthcare REIT (LSE: THRL) also looks attractive. After recent declines, the stock is trading with a dividend yield of 6.6%. Target owns and operates a portfolio of purpose-built care homes. At the end of December, the business owned and operated 71 assets let to 28 tenants with a total value of £590m.

The demand for care facilities in the UK is only growing. The coronavirus pandemic is unlikely to change this trend. That makes Target stand out as one of the market’s top income stocks.

The company is also well-financed. Its net loan-to-asset ratio was just 20% at the end of 2019. This suggests the group has plenty of firepower to both maintain operations for an extended period if income drops substantially.

The low level of borrowing also indicates the business has the financial flexibility to pick up assets on the cheap from other providers that might be struggling.

H&T Group

The final income stock I’d consider buying in April is pawnbroker H&T Group (LSE: HAT). Ethical considerations aside, businesses such as H&T tend to do well in times of economic hardship. As it looks like we are heading towards one of the worst economic contractions on record, H&T could be about to see a surge in business.

However, in the near term, the outlook for the business is bleak. H&T stores across the country are currently closed, in compliance with government guidelines. This will hit earnings in 2020. It’s likely management will also cut the dividend as a result.

Nevertheless, when the stores re-open, there could be a boom in demand for H&T’s services. This implies management will be able to reinstate shareholder payouts. Reinstating the dividend at the current level would give a yield of 5.3%.

Indeed, banking businesses are cyclical to their cores, and several years of high earnings in the sector are making me nervous. Instead, I’m keen on H&T (LSE: HAT), which earns its living in the wider financial sector from pawnbroking and other services.

Great figures

The share price is perky this morning, up around 10% as I write, on the release of the full-year results report. And the figures are good. Revenue rose by 12% compared to the prior year and diluted earnings per share shot up by 48%. The directors pushed up the total dividend for the year by 6.4%.

Since 2014, the company has a fine record of dividend growth, which has been backed by generally rising revenue and earnings. Meanwhile, two acquisitions during 2019 have helped push the store count from 182 up to 252.

Chief executive John Nichols explains in the report the new assets have combined with a “strong” core operating performance and a “beneficial” gold price to produce an “exceptional” trading performance during the year.

The price of gold is important to the firm because of its purchasing activities. H&T buys jewellery directly from customers through its stores and sells some of the gold for scrap. And it refurbishes some of the items it buys along with some that customers have forfeited from the pawnbroking pledge book. The company then sells these in its stores, along with a small amount of new or second-hand jewellery it purchases from third parties.

The firm’s pawnbroking activities involve securing loans to customers against collateral, known as the pledge. And more than 99% of the collateral offered by customers tends to be mainly gold, along with other precious metals, diamonds and watches. Like a bank, a pawnbroker such as H&T earns income on the interest charged on the loan secured by a pledged item.

Expansion going well

The company’s acquisitive and organic expansion is going well. The almost 39% increase in the pledge book over the period demonstrates that. Nichols reckons H&T’s “growing momentum” demonstrates the success of the firm’s strategy as well as ongoing strong demand for pawnbroking and related products. The outlook is positive, although he’s “mindful” of current macro uncertainties.

And in today’s world, it’s difficult for me to imagine the need for pawnbroking services ever receding. I like the way H&T appears to be aiming to consolidate the sector and see it as a survivor in these tough economic times.

Meanwhile, with the share price close to 336p, the forward-looking earnings multiple for 2020 sits just below seven. And the anticipated dividend yield is a smidgeon above 4.3%. I reckon the valuation is attractive.

One stock that has recently cropped up on my radar is pawnbroker H&T Group (LSE: HAT). Ethical considerations aside, over the past five years, this company has proven to be a fantastic investment. Earnings per share have more than doubled as net profit has increased from £5.4m to £10.8m for 2018.

And as profits have increased, management has hiked the company’s dividend payout. The per share distribution has risen from 4.8p in 2014, to 11p for 2018. It looks as if there is still plenty of room for the dividend to grow from here.

Dividend cover — the ratio of earnings per share compared to dividend per share — was 2.7 times in 2018 and is expected to hit 2.9 for 2019. Overall, analysts have pencilled in earnings per share growth of 13% for this year. 

Growth on track

It looks as if the firm is well on the way to meeting this target. H&T’s half-year results reported a 7.9% increase in profit before tax for the first half of the year with operating profit before non-recurring expenses rising 16%. 

With profits up by a high single-digit percentage for the first half of the year, management has decided to increase the interim dividend payout by nearly 7% to 4.7p. Analysts were only expecting growth of 4.6% for the full year. So, it looks as if H&T’s dividend might grow faster than expected in 2019.

This is precisely what I’m looking for in a dividend investment. With a dividend yield of 3.4% at the time of writing, H&T ticks all the boxes on my dividend stocks checklist. That’s why I’m considering it for my Stocks and Shares ISAs today.

Time to buy?

I’m also going to be taking a closer look at the accident management assistance group Redde (LSE: REDD). Shares in this company have been a pretty poor investment in 2019. The stock is down around 56% year-to-date after management revealed that the business was not successful in securing the renewal of a hire and repair contract with a large insurer. This contract had been worth nearly £112m a year to the business.

The loss of the contract will effectively wipe out 10% of Redde’s bottom line. Nevertheless, management is confident that the company can replace this business relatively quickly, considering the scale of the group’s pipeline. Indeed, since 2014, Redde’s sales have increased by more than 160%. 

Considering the company’s track record of growth, I think the recent decline could be an excellent opportunity to snap up shares in this well-run business at an attractive price. 

The stock is currently dealing at a forward P/E of just 8.1 and, more importantly, supports a dividend yield of 10.6%. While there may not be much in the way of dividend growth to look forward to in the next few years as Redde tries to replace the lost business, I think there is a good chance dividend growth will return when the company’s sales start to pick up again. 

With this being the case, I’m looking to add the stock to my portfolio shortly.