Could these bargain 6.5%-yielders help you retire early?

Roland Head asks whether these two stocks present a buying opportunity that’s too good to miss.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A useful rule of thumb is that dividend yields of more than 6% indicate that the market is pricing the risk of a dividend cut.

The 6% threshold isn’t cast in stone, but I’ve found it to be a useful tool when screening the market for possible buys.

In this article, I’ll look at two stocks which each boast forecast yields of about 6.5%. Are these shares bargain buys at current levels, or is a storm approaching?

Should you invest £1,000 in Greencoat Uk Wind right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Greencoat Uk Wind made the list?

See the 6 stocks

As safe as houses?

Housebuilder Galliford Try (LSE: GFRD) is also involved in public sector construction projects. This makes it an interesting alternative to conventional housebuilders.

The group’s pre-tax profits rose by 19% to £63m during the six months to 31 December, despite a more modest 4% rise in sales. This lifted Galliford’s return on net assets from 23.1% to 24.9%, which is impressively high.

The interim dividend rose by 23% to 32p, putting the firm on-track for a full-year payout of 94p. This equates to a yield of 6.2%. The company said that the increased payout reflects “confidence in the full year outlook”.

However, the firm’s profits will need to be significantly higher during the second half of the year. Galliford’s H1 earnings of 61.9p per share are significantly less than half the 150.4p per share figure which analysts are forecasting for the year to 30 June.

Although Galliford’s forecast P/E of 10 looks superficially cheap, the UK housing market is several years into a strong period of growth. Profit margins are very high at the moment. A housing slowdown could change out outlook dramatically. I’d rate Galliford Try as a hold at current levels, but I’m not sure this is the best time to buy.

This P/E of 8 is tempting

Highly-regarded fund manager Neil Woodford has stayed loyal to Capita (LSE: CPI) over the last year, despite the outsourcing group losing 53% of its value during that time.

The firm’s problems are familiar. Bad contracts, rising costs and excess debt have put pressure on profit margins. These are similar problems to those which afflicted peers Serco and G4S. However, both of these firms are now well on the way to recovery. So does Capita offer us an opportunity to get in at ground level ahead of a strong turnaround?

Quite possibly. But a couple of risks remain. The first one is that Capita may yet face further contract problems. This firm has tried to address this with a contract review and a £50m write-off. But it will take a little longer before the market can be confident that the remainder of Capita’s contracts are performing in line with expectations.

The other risk is debt. Management expects the firm’s net debt to EBITDA ratio to have reached 2.9x by the end of last year. That quite high and is above the firm’s target range of 2.0-2.5x. Capita hopes to sell its Asset Services division this year to raise cash and reduce debt. But there’s no buyer as yet, so the firm could still be forced to ask shareholders for cash.

Capita shares trade on a forecast P/E of 8.2 with a yield of 6.3%. I think the price reflects the mix of risk and potential reward, so I’d hold for now.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »

Investing Articles

Are Trump’s tariffs a once-in-a-lifetime chance for ISA investors to get rich?

The £20,000 Stocks and Shares ISA limit will reset on 6 April. Smart investors could use current market volatility to…

Read more »

Investing Articles

Here are the latest Persimmon share price and dividend forecasts

Our writer looks at the latest forecasts for the Persimmon share price and considers what level of dividend the stock…

Read more »

British Pennies on a Pound Note
Investing Articles

Up 900%, could penny share Kodal Minerals have further to run?

Over five years, this penny share has increased in value by a factor of 10. Could the latest news persuade…

Read more »

Investing Articles

3 world-class stocks to consider buying, while they’re ‘on sale’

Looking for stocks to buy? These three all have attractive long-term prospects and are currently trading 20% or more below…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could BP’s share price rebound over the next 12 months? These analysts think the answer is ‘yes’!

BPs share price has plummeted over the last year. But City brokers think things are about to turn around, as…

Read more »

Investing Articles

Is this an unmissable opportunity to buy Nvidia stock?

Nvidia stock is down 33% from its peak, driven by tariffs and geopolitical pressures. Despite this, some investors may spy…

Read more »