A cheap FTSE 100 share?

My first pick is television group ITV (LSE: ITV). ITV’s share price has risen by around 10% over the last year, but I still think this business is probably too cheap.

City analysts expect ITV’s earnings to have returned to 2019 levels in 2021, with further growth expected in 2022. These estimates price the stock on just eight times forecast earnings. Dividends are making a comeback, too. Forecasts suggest a payout of 3.6p per share for 2021, rising to 5.9p in 2022 — that would give a 5% dividend yield.

Streaming television represents a risk to ITV’s ad-funded broadcasting business. But the group is working hard to turn streaming into an opportunity. The ITV Studios business produces programmes for ITV and other channels. By 2026, 25% of sales are expected to come from streamers.

I’m holding my ITV shares in a top-rated stocks and shares ISA. I may buy more before 5 April.

This business keeps vans on the road

Redde Northgate (LSE: REDD) probably isn’t a household name for you unless you run a fleet of vans. Northgate is one of the largest van hire companies in the UK and Spain, with a fleet of 120,000 owned and leased vehicles. The group also looks after over 600,000 vehicles operated by its clients.

Northgate’s merger with accident management specialist Redde in early 2020 means that the combined group now offers a full range of mobility services, including leasing, fleet management, repair, and resale.

One unusual aspect of this situation is that Redde Northgate has benefited from the global shortage of new vehicles. Profit margins have risen and resale values on used vans have been very strong. The main risk I can see is that when market conditions return to normal, we could see profits slump.

So far there’s no sign of this. I’m reassured by Redde Northgate’s recent performance and recently added the shares to my portfolio. Trading on just nine times forecast earnings, with a 5% dividend yield, they offer good value in my opinion.

A 2-for-1 stock for my Stocks and Shares ISA?

When a company splits itself into two, I’ve found it can often create opportunities for investors. The two separate companies are often valued more highly than they were as one. Sometimes they perform better, too.

I think that is what could happen at CMC Markets (LSE: CMCX). This online financial trading firm is thinking about separating its UK stockbroking business into a new company.

The risk, of course, is that sometimes a company splits itself to get rid of a bad business. One problem with CMC is that its profits can be volatile, depending on market conditions. I’m also not sure how profitable the stockbroking business might be on its own.

However, I’m comfortable backing the judgement of CMC founder Lord Cruddas, who still owns more than 55% of the business.

CMC’s earnings are expected to recover over the next year, pricing the shares on just nine times forecast earnings, with a 5.5% dividend yield. I’d be happy to buy at this level.

Many investors will be drawn to the ‘usual suspects’ for their dividend fix, namely FTSE 100 companies. However, I think looking further down the market spectrum can also be a good idea. Here are three less-well-known shares I’d be prepared to buy today.

Liontrust Asset Management

Like many other listed companies, fund manager Liontrust (LSE: LIO) hasn’t had the greatest of starts to 2022. Actually, that’s an understatement. Its share price has now tumbled 24% year-to-date, most likely due to concerns that profits will fall due to people pulling their money out of the market. 

That’s said, it’s still up 34% over the last 12 months. And, of course, the beauty of investing for dividends is that I can take such volatility in my stride so long as the passive income keeps rolling in. 

Importantly, Liontrust has consistently hiked its annual payout by a double-digit percentage for many years. Analysts have the company returning 64.1p per share in the current financial year. At today’s share price, that equates to a yield of 4%. It’s also sufficiently covered by profits, making a cut unlikely.

That said, investors need to be aware that the fund management industry is notoriously competitive and there’s always a risk Liontrust may need to cut fees to help retain clients.

Redde Northgate

Redde Northgate (LSE: REDD) provides “mobility solutions and automotive solutions” to businesses. It also strikes me as a great source of dividends.

The £1bn-cap company looks set to return 19.4p per share to holders in FY22, giving a chunky yield of 4.9%. This should help holders to keep up with rising costs. Like Liontrust, the payouts are safely covered by expected earnings. With the exception of 2020, Redde Northgate is also a regular dividend hiker. 

The shares aren’t exactly expensive either, changing hands for nine times forecast earnings. That’s despite the company’s value rising 45% over the last 12 months!

I suppose one thing to bear in mind here is that Redde Northgate may need to replenish its fleet of vehicles every now and then. That could end up reducing margins significantly, especially at today’s prices.  

Synthomer

Chemicals firm Synthomer (LSE: SYNT) is a final secret stock offering a tempting dividend yield. It’s a leading supplier of aqueous polymers that are used in things such as latex gloves.

Just like the aforementioned asset manager, Synthomer’s share price has been on a downer since the beginning of 2022. In the last 12 months, it’s fallen 22%. On a positive note, this does leave them looking cheap at just seven times expected earnings. 

Unfortunately, the dividend is expected to fall by 22% this year. However, I’m including it here for two simple reasons. First, the yield is still expected to be 5%, which is a far more passive income than I’d get from a cash savings account. Second, this payout looks thoroughly secure based on predicted profits. 

Similar to Redde Northgate, a risk with Synthomer is that supply chain hold-ups may impede growth. This may explain why the shares have been out of form recently.

Notwithstanding this, the vast majority of brokers covering the company remain positive. This suggests now might be as good a time as any for long-term investors like me to load up.

Integrated mobility solutions  

The first stock is Redde Northgate (LSE: REDD). The company is the result of an all-share merger between Redde and Northgate that completed back in early 2020. Now, the combined company offers a range of mobility solutions across areas such as vehicle rental and accident management using its network of over 110,000 owned and leased vehicles.

The share price is up 83% over the last 12 months, and management said a cost saving of £20.5m has been secured ahead of schedule. These are signs that the merger is going well.

Analysts are expecting respectable growth for the business in 2022 and 2023, with earnings set to grow between 15% and 19% in both years. The valuation is cheap, in my view, with the stock on a forward price-to-earnings (P/E) ratio of 11.5. The dividend yield is also attractive at 4.4%.

I do have concerns over supply constraints in the commercial vehicle market, though. These issues have meant prices have risen, and if Redde Northgate needs to replenish its fleet of vehicles then margins could be squeezed. The company said it has been a net positive so far as it has been able to sell older vehicles at higher prices. I do still see this as a key risk to consider before buying the shares.

Food manufacturing 

The next FTSE 250 company I consider good value is Premier Foods (LSE: PFD). It is a food manufacturing business with a portfolio of recognisable brands. Premier Foods employs over 4,000 people at 15 manufacturing sites and offices across the country.

The recent first-quarter update showed that the business has made a very encouraging start to the year. Comparing to the same period two years ago (pre-Covid), overall revenue was up 6.3%, with branded sales rising 9.3%. Premier Foods is also selling more online now, rebasing to nearly twice the level they were before the pandemic.

The shares trade on a forward P/E of 9.7, which could be particularly cheap if the momentum in revenue growth continues.

My big concern for Premier Foods is the prospect of higher inflation. Input costs have been rising significantly this year, and this could severely impact margins in the business. If Premier Foods can’t pass these costs on to consumers due to a lack of pricing power, then the share price could tumble. It’s a significant risk to consider.

Final thoughts

I think Redde Northgate and Premier Foods are attractively valued relative to forward earnings. Redde Northgate also offers a respectable 4.4% dividend yield.

In both cases, though, rising inflation could be an issue. Redde Northgate is directly exposed to the troubled automobile market, whereas Premier Foods could suffer from a lack of pricing power.

On balance, I think both stocks are cheap enough to account for the risks ahead. I’d look to buy Redde Northgate and Premier Foods for my portfolio.

Investec

Asset manager Investec (LSE: INVP) is one stock that, 2020 aside, has reliably increased its dividends. I’m intentionally ignoring last year because a global pandemic (and the many dividend cancellations ) will hopefully prove an anomaly.  

Based on data from Stockopedia, Investec is down to return 18.7p per share in the current financial year. This would represent a 44% hike to the total payout. At last Friday’s closing price of 298p, that becomes a monster yield of 6.3%. Importantly, this payout looks set to be covered well over twice by profits. In other words, it looks very secure. Another positive with Investec is that its shares look cheap at a little under 8 times earnings.

That said, it’s important for me to be aware that financial stocks such as Investec are vulnerable to economic setbacks. Should the global recovery slow, there’s a possibility that the INVP share price will lose momentum. The stock is also still to recover to pre-Covid levels. 

Redde Northgate

Integrated mobility platform Redde Northgate (LSE: REDD) supplies vehicles to businesses alongside maintenance, repair, recovery and accident services. That sounds dull as ditchwater. However, this is another FTSE 250 constituent with a good record of regularly raising its payouts. And when I’m looking for dividends, that’s all that really matters.

A 17.8p per share return is expected in FY22. That’s a yield of 4.1%. For perspective, the FTSE 250 index itself returns just 1.8%. Like Investec, REDD’s cash returns are protected twice by earnings. 

REDD stock recently hit a three-year high as a result of the company snapping up electric vehicle charging equipment supplier ChargedEV. This sounds like a prudent acquisition to me considering the growth expected in this area over the next decade or so as more customers transition away from internal combustion engines.

A P/E of 12 also looks great value as things stand. Then again, REDD doesn’t have the high returns on capital and chunky profit margins I usually look for as a way of lowering risk. So, I’d need to make an exception here. 

Synthomer

Speciality chemicals firm Synthomer (LSE: SYNT) is a final example of what I consider to be one of the best stocks to buy for rising income. 

Analysts believe that SYNT will return a total of 23.5p to owners in FY21. If this comes to pass, it would represent a doubling of 2020’s payout. Again, this cash return would be easily covered by profit. In fact, Synthomer’s dividend is the safest of those mentioned by this measure. 

I’d also be buying a stake in a company in rude health. Synthomer reported a threefold increase in EBITDA (to £322.7m) over the first six months of 2021. Importantly, this was also above that logged for (pre-Covid) H1 2019.

I think this makes the stock — at just below 8 times earnings — look a steal. Even so, I’d be careful not to assume that recent dividend hikes will be replicated. Moreover, no income stream in the world is ever guaranteed.

As such, investors may be better off seeking an income from high-quality, high-yield dividend stocks. In many cases, these companies also offer the potential for capital gains as well as income.

With that in mind, here are two 10% yielding dividend stocks that could offer long term income investing potential and capital growth.

NewRiver REIT

Real estate investment trust (REIT) NewRiver REIT (LSE: NRR) has seen its share price underperform over the past 12 months due to challenges in the retail sector.

However, despite these issues, the company has continued to report rising incomes from its property portfolio.

Management has also been repositioning the portfolio, selling low-quality properties and reinvesting the proceeds back into high-quality assets with trustworthy tenants. This strategy has so far helped the company avoid some of the pain its peers are suffering.

Still, despite this progress, NewRiver currently trades at a significant discount to its net asset value, with its price-to-book (P/B) ratio being 0.8. On top of this, the stock currently offers a dividend yield of 11%. With the payout backed by income from property rents, as well as asset sales, this yield looks exceptionally safe.

These metrics indicate that NewRiver’s shares offer excellent value for money with a wide margin of safety at current levels. Therefore, now could be a good time to take advantage of the continued uncertainty surrounding the business and buy a share of this income champion.

Redde plc

Another income stock that yields more than 10% today is Redde (LSE: REDD). Like NewRiver, Redde has fallen on hard times over the past 12 months. A poor trading update at the beginning of 2019 cut the stock in half.

After this setback, the accident management assistance and vehicle management company has been working flat out to return to growth. It seems as if trading has improved since the profit warning with analysts expecting a slight improvement in earnings per share for 2019, which implies that the business has started its turnaround.

Despite this progress, the company’s shares continue to trade on a low valuation. The stock has a price-to-earnings (P/E) ratio of just 8, which suggests that the capital growth prospects for it could be high.

It also supports a dividend yield of 10.9%, with the payout being covered 1.1 times by earnings per share. These metrics imply that Redde’s total return prospects could be big.

With the company committed to returning to growth, now could be the time to buy Redde and take advantage of the stock’s low valuation, as well as its market-beating dividend yield. These metrics suggest the business has the potential to deliver a growing sustainable passive income to its investors for many years to come.

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.

We’ve seen decent EPS growth for the past few years, though P/E valuations have perhaps suggested the shares were fully valued — especially as the firm is in the nebulous support services industry, in this case in the motor trade, offering accident management support, legal services, fleet management, and things like that.

Then in March this year, the share price crashed after the company revealed it had failed to renew a hire and repair contract with a large insurer. The financial effect was estimated at an 18% reduction in consensus revenue forecasts, with an 8.7% hit to adjusted operating profit. The share price has recovered a little since then, but it’s still down 37% over the past 12-months.

Update

But things could be better than they appear after the firm released a trading update Wednesday. The failed contract, scheduled to end in July, will now be tapered downwards to November, and that will lessen the drop in profits. The company also says “there have been a number of new contract wins in other parts of the Group as well as a contract renewal with a major insurer.”

Even being pessimistic on full-year profits, and assuming a 9% EPS fall based on original estimates for operating profit, I still can’t see the shares on a forward P/E of much more than nine. I obviously don’t know what’s going to happen to the dividend, but with the share price so low I can see plenty of scope for a cut while still maintaining a yield close to last year’s 6.6%.

The share price fall looks overdone to me, and Redde is on my shortlist.

Pleasantly dull

Topps Tiles (LSE: TPT) is another company that looks cheap on fundamentals. It’s the kind of nicely boring company that can just keep plodding along generating cash and handing out tasty dividends. And while supplying wall and floor tiles and similar coverings might sound like a business that’s relatively easy to compete with, Topps’ scale (as “the UK’s leading tile specialist”) gives it a big defensive barrier, in my view.

The past few quarters have been tough in the current, squeezed retail environment, and I think it’s been wise to wait until we hear more of how 2019 is progressing.

Wednesday’s Q3 update showed an improvement in like-for-like sales. Though the first half brought a weak 0.2% rise, sales in Q3 are up 3.8%. The company has launched 25 new product ranges so far this year, and those released in the last 12 months contributed 20% to sales.

Valuation

Forecasts currently suggest essentially flat EPS over the next couple of years, but that leaves the shares on P/E multiples of under 10. 

My one caution is with Topps’ net debt, which stood at £18m at the halfway stage at 30 March. That’s about 1.7 times annualised pre-tax profit, which makes me a bit twitchy. But it’s a big improvement on a net debt figure of £25.1m a year ago.

With a policy of keeping dividend cover at around two times, and with dividend yield forecast to reach 5.3% in 2020, I’m watching — but I’ll wait for full-year results. 

The performance from a business perspective, though, appears to be relatively sound. It now offers a wide margin of safety, which could suggest that there’s a buying opportunity on offer. However, not all stocks which have experienced declines of late may offer the same level of appeal, as highlighted by a company which released an investor update on Tuesday.

High valuation

That stock in question is accident management, incident management and legal services specialist Redde (LSE: REDD). The positive start to its financial year, reported in its recent AGM statement, has continued into December. Sales are showing an increase over the same period last year and reflect continued growth in trading volumes. As a result, trading profits are also ahead of the prior year.

While the company’s performance in its financial year-to-date has been positive, it’s expected to report a rise of just 1% in earnings in the current year. This suggests it may lack a clear catalyst to allow its share price to recover following its decline of 14% in the last three months.

Even after its recent drop, Redde doesn’t seem to offer a wide margin of safety. For example, it has a price-to-earnings (P/E) ratio of 12.4, which suggests it may be fully valued, given its modest growth outlook. At a time when other stocks offer wider margins of safety following recent falls, it may be a company to avoid.

Improving outlook

In contrast, HSBC could offer strong recovery potential after a challenging period. The bank is expected to post a rise in net profit of around 5% in the next financial year, with investment in its growth strategy set to pay off.

Despite its improving financial outlook, it has a P/E ratio of around 11.4, which suggests that it may be cheap relative to some of its FTSE 100 peers. And since it has a dividend yield of 6.1%, from a payout that is covered 1.4 times by profit, its income potential appears to be high relative to the large-cap index.

Of course, HSBC faces a number of risks. The prospects for the global economy are uncertain at present. There’s a danger that a full-scale trade war will come into effect in 2019, with relations between China and the US poor following a number of tariffs placed on various goods and services. This could reduce investor expectations when it comes to the GDP growth prospects for a variety of countries and regions.

However, in the long run, the bank’s low valuation, high yield and diverse presence across the global economy could allow it to generate improving total returns, in my opinion.

Looking ahead, there could be risks to the oil and gas sector’s prospects, which may pose a threat to the company’s share price performance. Alongside another stock that’s also outperformed the FTSE 100 in the last year, and which released a positive update on Wednesday, could Premier Oil be worth buying for the long run?

Income potential

The second company in question is accident management, incident management and legal services specialist Redde (LSE: REDD). Its trading update stated that the positive start to the financial year, reported in September, has continued. Sales are up on the previous year, which reflects a rise in trading volumes. As a result, trading profits are ahead of the previous year, with the company optimistic about its future potential.

Its share price has risen by around 14% in the last year. Despite this rise, it continues to have a relatively high dividend yield. The income return in the current year is expected to be 6.7%, which suggests the stock could still offer value for money, even after its capital gains of recent months.

With Redde having a track record of growth, and what appears to be favourable operating conditions, the company could perform well in future. As such, it may be able to continue to outperform the FTSE 100 over the coming years.

Low valuation

While the Premier Oil share price may have experienced a strong performance in recent months, investors still seem to be relatively underwhelmed about its financial outlook. The company is expected to post a rise in earnings of 74% in the next financial year, as a result of higher oil prices and increased production. However, its shares trade on a forward price-to-earnings (P/E) ratio of around 5.5, at present. This suggests that they may offer a margin of safety.

Of course, oil shares are notoriously unpredictable. Just a few years ago, Premier Oil was in a difficult position, with high debts and a low oil price hurting its outlook. Now, free cash flow is improving, and debt levels are set to fall over the medium term.

Given the uncertain outlook for the world economy, a more challenging period for the oil price could be ahead. This could lead to less growth potential within the wider industry, while investor sentiment may also weaken to some degree. However, with the long-term prospects for the industry upbeat, due to forecasts of resilient demand and limited supply, the potential for Premier Oil to keep beating the FTSE 100 over the coming years may begin to improve.

If you want to generate a retirement income from your stock portfolio, dividend stocks like this can seem very attractive. But it’s very important to make sure that these payouts are sustainable and are not a warning that problems lie ahead. Let’s take a look.

An 11% yield. Really?

FTSE 100 mining and steel group Evraz (LSE: EVR) boasts a forecast dividend yield of 11% for 2018. Looking at the group’s performance so far this year, I have no reason to doubt this projected payout.

Cost savings and stronger market prices meant that the group’s earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 65.5% to $1,906m during the first half of this year, compared to the same period last year.

Free cash flow rose by 20% to $661m and the group was able to reduce net debt by $100m to $3.9bn, while still paying out $617m in dividends.

Shareholder dividends paid with respect to the 2018 financial year are expected to total $0.70 per share (about 54p), giving a prospective yield of about 11%.

Buy, sell or hold?

The Evraz share price has risen by 36% so far this year, cementing the company’s place in the FTSE 100.

However, this year’s bumper profits (and dividend) are expected to be a one-off. Analysts expect earnings to fall by 35% to $0.75 per share in 2019. The dividend is expected to fall by a similar amount to $0.41 per share.

These projections put the stock on a forecast price/earnings ratio of 8.4, with a prospective yield of 6.5%. This still seems attractive to me. I think there’s a good chance that Evraz will continue to deliver above-average returns to shareholders.

3 years of 7% dividends

One of the other high-yield stocks on my watch list is claims management firm Redde (LSE: REDD) provides legal services, courtesy cars and other services related to motor insurance claims.

The group was hit by regulatory changes a few years ago, but seems to have adapted successfully to the new rules. Revenue has risen from £204m in 2012/13 to £472m in 2016/17. The group’s 2017/18 results, published on Thursday, showed further progress. Revenue rose by 11.6% to £527m, while the group’s pre-tax profit was 22% higher, at £38.8m.

One of the attractions of this business is that it generates a lot of free cash flow. This allows the company to pay out the majority of earnings in the form of cash dividends. For this reason, Redde shares have offered a dividend yield close to 7% for at least the last three years.

Can this continue?

I’ve been wary about investing in this stock in the past, but I’m increasingly convinced that the group’s business model is sustainable and attractive to investors.

Redde’s performance last year suggests to me that it’s gaining market share, with a 19.3% increase in credit hire cases and more repairs completed.

Analysts expect profits to be fairly flat in 2018/19, putting the stock on a forecast P/E of 14 with a prospective yield of 7.1%. Based on this year’s performance, these estimates seem very reasonable to me. If you’re looking for high-yield dividend stocks, this could be worth a closer look.