2 shares on my watchlist yielding more than 5%

These stocks look to be future income champions.

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The market’s best investments are usually hidden from plain sight and away from the crowd. Because they are difficult to find, these stocks often trade at deeply discounted valuations, giving investors who are willing to put in the extra effort an excellent opportunity to profit.

I believe Anglo Pacific Group (LSE: APF) is one such company. Anglo Pacific is a resource royalties company, which means it’s not as exposed to commodity prices as traditional miners. It has revenue-based royalty deals limiting direct exposure to operating and capital costs of the underlying mine operations. The beauty of this business model is that it’s hugely cash generative and there’s very little capital required to generate returns.

Cash cow

In 2016 the company received £19.7m in royalty income from investments and free cash flow for the period was £13.2m.

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The majority of this income is returned to shareholders with a minimum annual payment of 6p per share. Management has committed the company to pay 65% of earnings out to shareholders, and at current revenue run rates, the 6p per share payout will have to be revised upwards this year.

However, it doesn’t look as if the market understands the full dividend potential here. Management is looking to pay 65% of earnings per share to shareholders via dividends, but City analysts have only pencilled-in a dividend payout of 7p per share for 2017 on earnings per share of 15.6p. A payout ratio of 65% is equal to a dividend of 10.1p per share giving a yield of around 8.7% at current prices. Of course, management may decide to adopt a more conservative dividend policy if earnings come in below expectations, but right now, it looks as if Anglo Pacific is an extremely undervalued dividend play.

Income and capital

I believe Palace Capital (LSE: PCA) is another hidden dividend champion. The company is a commercial property investment firm with a portfolio worth £185m and a net asset value per share of 419p. At the time of writing, shares in the firm are trading at a near 15% discount to NAV and it is here, as well as the company’s 4.5% dividend yield, where I believe the value lies.

City analysts believe the company is set to hike its dividend payout by more than 10% for the year ending 31 March to 18p per share, which would give a dividend yield of 5.1%, an extremely attractive yield for a solid property investment.

At the same time, investors will be able to take advantage of Palace’s discount to NAV. By buying the shares at a 15% discount to the last recorded net asset value, there is a near 18% upside available in addition to the yield of 5.1%. If the company manages to increase its NAV during the period, the return could even be even higher.

So, if you’re looking for a stock that can provide both income and capital growth with reduced risk, Palace Capital might just be the one.

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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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Anglo Pacific. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p 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 8.5%, 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

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