These bargain-basement dividend stocks could help you retire early

High income and growth potential could make now the right time to buy these two shares.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 9 May, 2017 12:14 pm BST

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.

william hill — Photo: raver_mikey. Cropped. Licence: https://creativecommons.org/licenses/by/2.0/

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With the FTSE 100 trading close to its all-time high, it may seem as though share price growth is a given over the medium term. However, there are still numerous risks which could halt the FTSE 100’s recent gains and send share prices lower. For example, Brexit, the election and higher inflation may cause some difficulties for the FTSE 100. As such, buying shares which have wide margins of safety as well as impressive income prospects could be a shrewd move.

Improving financials

Reporting on Tuesday was gaming company William Hill (LSE: WMH). It announced improved performance following a difficult and highly uncertain period for the business. Its strategy appears to be working well even in a highly competitive industry, with the company reporting a rise in wagering and net revenue across all of its four divisions. Of particular note was double-digit wagering growth in Australia and the US, while its online operations saw a rise in amounts wagered of 9%.

With a dividend yield of 4.2%, William Hill continues to offer a relatively high income return. However, its dividend appeal looks set to be strengthened by a forecast rise in shareholder payouts. They are expected to increase by 5.5% next year and since they are covered around twice by profit, there is scope for further growth over the long run.

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As mentioned, William Hill faces a highly competitive outlook. Sector consolidation has made rivals financially stronger, but with the company expected to record a rise in earnings of 8% in each of the next two years it seems to be a sound buy. That’s especially the case since it trades on a price-to-earnings growth (PEG) ratio of just 1.4 at the present time.

Low valuation

Also offering a potent mix of capital growth and income returns is sector peer Stride Gaming (LSE: STR). It may only yield 1.2% at the present time, but with dividends covered over eight times by profit, there is a good chance of rapid growth in shareholder payouts over the medium term. Evidence of the potential for this can be seen in the growth of dividends in the current year, with them rising by over 10%.

As well as dividend growth, Stride Gaming offers a wide margin of safety. It has a price-to-earnings (P/E) ratio of only 10.1, which suggests that it has a favourable risk/reward ratio. That’s especially the case since it is forecast to post a rise in earnings of 8% in the current year.

With the online bingo and social gaming sectors becoming increasingly popular among consumers, Stride could benefit from a tailwind over the medium term. While competition could remain high, there is scope for M&A activity and due to its low valuation, it could be a prime takeover target. As such, now could be the perfect time to buy it for the long run.