A near-penny stock with HUGE dividends

There are a number of ways in which UK share investors can capitalise on the UK’s rapidly-growing elderly population. One way I’d do this is to buy XPS Pensions Group (LSE: XPS) which trades at 139p. The Office for National Statistics thinks one in four citizens will be aged 65 and above by 2050. That compares with one in five in 2019.

I expect XPS Pensions — the biggest pensions consultancy in Britain — to exploit this demographic opportunity to its fullest. I also like this particular company because of its commitment to expansion. In December, it agreed to acquire industry peer Michael J Fox for a fee of up to £3.75m.

I think XPS Pensions is an especially good buy because of its dividend prospects. Its defensive operations mean it should have the confidence and the financial clout to pay big dividends year after year. Indeed, its yield for the two financial years to March 2022 and 2023 sit at 4.8% and 5.2% respectively.

I’d buy the company even though its thirst for acquisitions could come back to bite it, for example if an asset throws up unexpected costs or delivers underwhelming revenues.

Building for growth

A worsening shortage of residential rental properties is encouraging me to invest in The PRS REIT (LSE: PRSR) too. Rents on family homes are booming as demand outstrips supply. In the last financial year (to June 2021) this UK share was able to increase rental rates on re-let properties by 6.2% and to existing tenants by 4%.

This massive market imbalance saw rents in the UK rise at their fastest rate since 2008 in the third quarter of last year, according to Zoopla. The property listings giant thinks tenant costs will continue rising strongly and has forecast average growth of 4.5% in 2022.

It’ll take a long time for this rapid uptrend to moderate, given the massive amount of residential properties required. And in the meantime, PRS is supercharging its own production plans to make the most of the opportunity.

In December, it acquired three of five targeted sites on which it plans to build 383 new units. The business recently hiked its portfolio target to 5,700 homes from 5,200 previously.

Now PRS doesn’t come cheap. At current prices of 106p, the property firm trades on a forward P/E ratio of 29.5 times. This sort of valuation could cause its share price to drop sharply if it encounters problems, for example if building material prices continue to soar.

However, I believe the bright market outlook makes this ‘almost’ penny stock worthy of a handsome premium like this. Besides, a meaty 3.8% dividend yield helps to take the edge off The PRS REIT’s elevated earnings multiple.

Egypt is the continent’s third-biggest economy and is experiencing soaring demand for communications services. Telecom Egypt said last month that “the strong data momentum witnessed during the pandemic has persisted throughout 2021” and expects double-digit revenues growth in 2022. I was also impressed by forecasts that EBITDA margins are predicted to grow “in the mid to high thirties.”

Today, the Egyptian economy derives around a quarter of GDP from petroleum. Thus the steady transition from fossil fuels to greener sources could pose a significant indirect risk to Telecom Egypt. But I think progress elsewhere in the economy could offset this threat.

A top green penny stock

Supply chain issues are also causing huge problems in the construction industry. Costs are spiralling and developers are reappraising the economics of certain projects. Even if the will remains, huge raw material shortages are preventing building work from starting, or continuing in many cases.

In this environment, building products supplier Alumasc Group (LSE: ALU) faces a not-insignificant threat to profits in the short-to-medium term. However, I’m still considering adding this penny stock to my shares portfolio today.

Why? For one, through its Timloc brand it offers a broad range of construction products for the housebuilding sector. It’s therefore well-placed to exploit the housebuilding boom of the coming decade (the government aims to create 300,000 new homes a year by the mid-2020s).

Secondly, I like Alumasc’s focus on manufacturing sustainable building products, something that will stand it in good stead as governments and businesses aim to become greener. In the company’s words, most of its products “manage the scarce resources of water and energy in the built environment, and improve quality of life for the owner/occupier using recyclable materials.”

5.2% dividend yields!

XPS Pensions Group (LSE: XPS) is another cheap UK share on my radar today. This particular company is the largest pensions consultancy in the country. It therefore stands to make big profits as the local population rapidly ages (government statistics suggest one-in-seven people will be aged over 75 by 2040).

I also like XPS Pensions because it operates in a market which remains stable at all points of the economic cycle. This makes it a dependable bet for those seeking a steady flow of passive income. Incidentally, the yield here sits at an appetising 5.2% for this fiscal year.

I’d buy XPS Pensions despite the threats created by its acquisition-led growth strategy, which could lead to disappointing profits or unexpected costs on buying mis-steps. However, the business has had decent success on this front, although past performance is no reliable indicator of future performance.

The prospect of temporary choppiness doesn’t put me off, though. This is because I buy UK shares with a view to holding them for the long haul. Let me present three top nearly penny stocks I’d buy right now to make robust long-term returns.

SaaS star

I think Tribal Group’s (LSE: TRB) recent transformation programme could reap terrific rewards in the years ahead. This low-cost UK share offers a range of software services that allow educational institutions to serve and communicate with their students more effectively. And recently the IT firm has switched to a “software as a service” (SaaS) model to boost recurring revenues and give earnings growth a shot in the arm.

The former penny stock has been active on the M&A front too and recently acquired scheduling-and-timetabling-solutions specialist Semestry. It also continues to invest heavily in its Edge cloud-based range of products and launched its Edge Admissions module last month. I think it’s a top buy despite the ever-present risk of systems failure and data loss. Such occurrences could cause significant reputational damage that might harm sales to existing and potential customers.

Another top nearly penny stock

Zoo Media Group’s (LSE: ZOO) a nearly penny stock I think will thrive in an increasingly digitalised world. This particular UK share offers cloud-based media services to movie studios, streaming services, and television producers. Not only is it benefiting from the huge investment streamers like Netflix are spending on their own content. Zoo Media is also enjoying soaring demand for its localisation services as content is beamed around the world and dubbing and subtitling is needed.

I’d buy this UK share even though its elevated valuation could cause a problem later on. Zoo Media’s forward price-to-earnings (P/E) ratio of 55 times might prompt a share price crash if news flow around the company starts to disappoint.

Pensions powerhouse

I think pensions consultancy and administrator XPS Pensions Group (LSE: XPS) is a cheap UK share that could thrive as the country’s population rapidly ages. Office for National Statistics data shows that the number of Brits aged between 65 and 84 rocketed 23% in the decade to 2018. It has been suggested that the over-65s could represent a quarter of the domestic population by 2050, too.

I also like this almost penny stock as its non-cyclical operations means it can pay big dividends during good times and bad. Incidentally its yield sits a shade below 5% for this fiscal year (to March 2022). I think XPS is a top buy despite the problems that its acquisition-based growth strategy could throw up. Such problems could include the business ultimately overpaying to build its position in its fragmented marketplace.

Robust cash flow and dividends

The directors signalled a positive outlook and satisfaction with the outcome by raising the total shareholder dividend for the year by 2%. And XPS hasn’t missed any dividend payments because of the pandemic, suggesting a resilient underlying operation. In one indicator supporting that assumption, operating cash flow has been robust.

On top of that, XPS didn’t take up any of the Government Covid-19 support loans or furlough any of its staff. However, the company moved staff to home working at the start of the year and maintained “strong” client service through the challenges of the pandemic.

The directors said robust client demand across all pension divisions drove the year’s revenue growth. And much of the advance was organic in origin, helped by a regulatory tailwind. A new pensions bill and associated regulatory changes should continue to drive demand for the firm’s services, they think.

A “high proportion” of the company’s revenues are non-discretionary (that is, essential). And part of the strategy is to grow the services to existing clients following regulatory and market changes where clients need support.  So the current high level of regulatory change is one of the company’s opportunities.

Other routes to growth

XPS also aims to expand by gaining market share. And there’s a healthy pipeline of new business opportunities to pursue.

A third route to expansion via mergers and acquisitions is also a “core” part of the company’s strategy. XPS has executed three bolt-on acquisitions in recent years. And the directors reckon the company operates in a fragmented market ripe with further consolidation opportunities.

Overall, the outlook is positive. And the directors expect the business to deliver “at least” mid-single-digit percentage organic growth in revenues over the medium term. 

Meanwhile, with the share price near 138p, the forward-looking earnings multiple for the current trading year to March 2022 is just below 14. That’s set against analysts’ expectations for a mid-single-digit percentage increase in earnings. And the anticipated dividend yield is 5%.

I’d buy the stock for income from the stream of shareholder dividends and for steady growth from the business and the share price. However, with its market capitalisation near £284m, XPS is a small-cap company and smaller businesses can suffer from volatility. It’s possible for analysts’ assumptions to prove incorrect and I could lose money on the shares. Indeed, the share price was once much higher than it is today.

Nevertheless, I’d embrace the risks and aim to hold the stock for the long term as part of a portfolio diversified between several companies and sectors.

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.

The only problem with this strategy is that the coronavirus pandemic has forced many companies to withdraw their cash payouts. Many, but not all. Today, I’m going to look at two minnows that continue to offer very tempting dividends and also trade on low valuations. 

Cash ISA beater

I doubt many private investors are familiar with Wynnstay (LSE: WYN). Let me bring those of you up to speed. This firm manufactures and supplies agricultural products, such as animal feeds, fertiliser, and seeds. It also operates rural outlets, serving farmers and pet owners.

Rather conveniently, the £55m-cap also reported to the market last week. At £229.3m, revenue was 12% lower in the six months to the end of April, compared to the same period last year, as a result of commodity price deflation.

Nevertheless, adjusted operating profit rose 8% to £4.78m, with reported pre-tax profit up 4% to £4.3m. This was deemed a “resilient” performance by management in light of “exceptionally challenging market conditions.“

According to CEO Gareth Davies: “Wynnstay’s broad spread of agricultural activities is a significant strength, acting as a natural hedge against sector variations.” Even so, the company believes the rest of the year is likely to be tough going, due to the pandemic and Brexit-linked uncertainty. No real surprise there.

Now, what about those dividends? The confirmed interim payout of 4.6p per share might be the same as last year. But the fact the company is willing to pay up in this market environment, gives me confidence. Analysts are forecasting a total return of 14.2p per share in FY20, giving a stonking yield of almost 5.3%.

It’s also worth highlighting that Wynnstay trades on just 9 times earnings. While this may reflect ongoing threats and wafer-thin margins, I’d feel more comfortable taking a risk here than accepting the chicken feed offered by a Cash ISA.

Another dividend delight

Actuarial, consulting, and administration business XPS Pensions Group (LSE: XPS) may not quicken the pulse, but it’s another great small-cap dividend pick, in my view.

Like Wynnstay, it announced numbers to the market last week. Through a combination of new client wins and a boost from acquisitions, total revenue rose 9% to just under £120m in the year to the end of March. Pre-tax profit came in flat at £11.1m.  

I suspect XPS has just what a lot of investors want right now. Thanks to the essential nature of its work, earnings visibility is high. Moreover, the company suspects the pandemic is likely to increase demand for additional services over the short term.

That said, XPS has also said it could lose some earnings momentum. That’s if discretionary projects are deferred by trustees and new business opportunities continue to slow. A similarly mixed outlook then.

And the dividends? A total payout of 6.6p may be the same as the previous year, but this still gives a very satisfying trailing yield of 5.6%. I’d expect something similar in FY21.

Again, the shares aren’t expensive. XPS trades on just 11 times forecast earnings. 

Therefore, I am recommending buying two pension firms’ shares: Standard Life Aberdeen (LSE: SLA) and XPS Pensions Group (LSE: XPS). One firm is an industry behemoth with legacy and agency. The other is a relative upstart with a growing reputation, which made its market debut in February 2017.

If you take this two-pronged investment approach, you’re covering your bases. Firstly, you’re buying into a company that is part of the tapestry of the pension industry. Secondly, you’re buying shares in an incredibly ambitious firm whose small market capitalisation will ensure competitors might look at it closely with a view to a takeover at some stage.

An in-depth look at Standard Life Aberdeen

Standard Life Aberdeen has offices in 54 locations employing 6,000 people, managing and administer over £550bn of assets worldwide. The Standard Life brand is trusted by over 4.5 million customers. The firm is clearly recognised and trusted when UK savers and investors are looking for advice and financial products to buy.

Analysis of the firm’s latest key performance indicators for the accounting period ending December 2018 generates confidence in its ability to grow. Gross inflows rose by £75.2bn in 2018, while adjusted profits before tax came in at £650m. The company provided a healthy, yearly dividend of 21.6p.

The share price has risen from December’s 52-week low of 224p to trade at 290p at the time of writing. This is still some distance short of the 52-week high of 385p. The target price issued by a cohort of market analysts and brokers is currently 390p. Based on the current financials and recent bullish sentiment, there’s every possibility that the share price could revisit its 52-week high. Indeed, other Foolish colleagues share my view on Standard Life Aberdeen as a buy, most notably Roland and Rupert.

Despite being viewed by many as staid, safe and lacking ambition, the firm has recently taken steps to become involved with Age Partnership in the equity release market. This is a service for those aged over 55, which is predicted to experience significant growth over the coming years.

An impressive small-cap firm with a big future

XPS Pensions Group describes itself as “the largest pure pensions consultancy in the UK”. It advises over 1000 pension schemes and administer pensions for over 870,000 members. and employs 1,200 staff across 15 UK locations.

XPS Pensions Group’s latest set of figures have revealed a significant improvement. According to the 2019 interim report, revenue growth is up 113% to £52.2m and the dividend is up 10%. Adjusted operating profit is up 63% to £11.4m and business growth is up 3.3%.

The share price has enjoyed a rally over recent months, from printing a low of 132p in mid April, to trade at 159p at the time of writing. The 52-week high is 195p and brokers have set a target price of 245p. The share price is currently trading close to the 50-day moving average of 158p, just above the 200-day moving average sited at 150p. This could be technical evidence that price is ready to bounce back.

One company that ticks this box, in my opinion, is — somewhat ironically — XPS Pensions (LSE: XPS). With a market capitalisation of £340m, it’s hardly a minnow but I’d be surprised if it were currently appearing on many income investors’ radars.

Formerly known as Xafinity, the Reading-based firm’s purchase of Punter Southall earlier in the year created the largest specialist pensions business in the UK. It currently advises over 1,200 schemes and administers pensions for over 800,000 people.

Today’s interim results for the six months ended 30 September contained few surprises, which is probably just what holders would hope for.

Revenue rose 113% to £52.2m supported by the integration of Punter Southall (which contributed £26.7m). Although operating profit plummeted from £4.2m to £100,000 due to charges relating to the deal, adjusted operating profit, which strips out these costs, rocketed 63% to £11.4m.

Away from the numbers, XPS stated that it had seen “good client retention” over the period in addition to a number of new annuity wins. Looking forward, it stated that a favourable market backdrop should allow the company to recapture revenue growth over the second half of its financial year. Management now expects full-year profit to be “broadly in line with expectations”.  

Changing hands for 16 times earnings, XPS is on the pricey side, but some of this can be justified by the fact that demand for its services is unlikely to dry up anytime soon. Indeed, co-CEO Paul Cuff commented today on the “significant growth opportunities” that lie ahead for the company as a result of “an increasingly positive regulatory background“. 

But XPS is, I think, a decent option for income seekers too. As well as hiking its half-year payout by 10% to 2.3p per share today, the business is forecast to return a total of 6.85p in the current financial year, equivalent to a yield of 4.2%. 

Plenty of character

Another company that arguably doesn’t generate much press, but I think is a great source of dividends, is small-cap toy designer, developer and distributor Character Group (LSE: CCT). 

Despite the closure of Toys R Us hitting its performance in H1, today’s full-year results were cheered by the market as the company reported “comfortably achieving market expectations” and finishing the financial year “in a strong position“. Product ranges such as Peppa Pig and Teletubbies “remained in demand“, even though revenue and pre-tax profit at the £105m cap declined by 8% and 14% respectively over the year to the end of August. 

Encouragingly, Character stated that new financial year had started well and that it was “confident” on trading over Autumn and Winter which, of course, includes the particularly crucial festive period. As a further sign of this bullishness, the company raised its final dividend by 20% today, bringing the total cash return to 23p per share (a yield of 4.5% at the current share price of 513p).

With payouts comfortably covered by profits, not to mention a solid £15.6m net cash on the balance sheet, I wouldn’t be surprised if Character’s trend of raising dividends by double-digits over the last few years continues going forward.

With this in mind, here are three lesser-known stocks that I think can be comfortably bought and held through good and bad times. 

Massive market share

Small-cap kettle safety control designer and manufacturer Strix (LSE: KETL) has already done rather well for early holders since coming to the market a little over one year ago, rising 23% in value. 

While there’s probably no danger of the share price boiling over, last month’s trading update was certainly reassuring. In addition to stating that the company’s performance so far in 2018 had given management confidence that results for the full year would be in line with expectations, the mention of “particularly strong performance in North America” bodes well for Strix’s growth ambitions. 

Taking into account its already commanding 38% share of the global market in which it operates, low valuation (12 times forecast earnings) and chunky 4.2% yield — made possible by its strong cash flow conversion — Strix remains a mighty tempting proposition.

Pet play

Although offering nowhere near the same kind of payouts, I’m equally bullish on the medium-to-long term prospects for veterinary services provider CVS Group (LSE: CVSG). That’s despite the share price taking a battering since last November after the company revealed it was experiencing difficulty in recruiting clinicians in the aftermath of the EU referendum result. The fact that management has already sounded a cautious note on full-year earnings (to be revealed in September) hasn’t helped sentiment.

Temporary issues aside, CVS still smacks of a quality company in a fragmented industry. In addition to owning a huge estate of veterinary surgeries, the Diss-based firm also has an online presence (selling food and medicines) and a number of pet crematoria, giving it a diversified earnings stream. Since we can safely assume that people will always spend money on their furry friends,  this appears a far safer destination for your cash than many expensive, high-growth plays.

At almost 21 times earnings, CVS’s stock is still worth paying up for. Should things get worse before they get better, it’s surely time to get greedy. 

Dull but decent

It might not hit the headlines but I think XPS Pensions Group (LSE: XPS) is another great pick for investors wanting a bit more stability in their portfolios, especially as its line of business will always be in demand. The product of the recent merger between Xafinity and Punter Southall, the £350m cap is now the UK’s largest pension consultant and administration firm.

Based on a predicted 160% rise in earnings per share, XPS shares currently change hands on a P/E of just under 17. A PEG ratio of 1, however, suggests great value for all the growth on offer.

It gets even better. While the nature of the sector that XPS operates in means that its share price won’t exactly double overnight, the 4% yield should appeal to those looking for dependable income. Based on analyst projections, this payout is likely to grow to a juicy 4.6% next year.  

For those committed to pursuing the dream of early retirement, XPS may do your chances no harm at all.