Why these boring dividend stocks could help you retire early

By focusing on the long term, investors could see big profits from these stocks, says Roland Head.

| 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.

Good investments don’t have to be exciting. Shares of family-controlled timber group James Latham (LSE: LTHM) have risen by 198% over the last five years, and by 1,316% since September 2000.

This £167m company may not have shown up on your radar before, but today’s final results suggest to me that the stock continues to offer potential value for new buyers. Sales rose by 6.9% to £198.8m last year, while operating profit was up 7.6% to £14.2m. The total dividend was increased by 7.3% to 15.7p.

Latham’s accounts are refreshingly simple. Unlike those of so many companies, they aren’t packed with adjusted items or ‘what-if’ pro forma figures. What you see is what you get, and in this case I think it’s very attractive.

Surprisingly profitable

Operating margins were stable at 7.1% last year, and the group generated a return on capital employed of 15.1%. Both figures seem good to me, given the commoditised nature of most of the firm’s products.

Although £6m was invested in new sites, free cash flow of £3.4m was still enough to cover the payment of £2.9m in dividends. Net cash rose slightly despite the heavy spending, up from £15.8m to £16.3m.

In my opinion, the main risk facing investors is that a UK recession could cause a slump in demand for timber. This share price would probably take a big hit.

There’s no way to know how likely a recession is, but it’s worth remembering that Latham has been in the timber trade since 1757. I’d argue that a future downturn would be a buying opportunity, not a reason to sell.

In the meantime, these shares trade on a P/E of 15, with a yield of 1.8%. I’d be happy to start building a long-term position at this level, with a view to averaging down during the next market crash.

The perfect business?

Travel and insurance group Saga (LSE: SAGA) may seem a dull business. But the group’s focus on over-50s means that its customer base is expanding steadily as the UK’s population ages. These customers are also among the most affluent in the UK, with high levels of home ownership and disposable income.

In a trading statement today, the group confirmed that trading so far this year has been in line with expectations. Analysts expect the group’s earnings per share to rise by 4.3% to 14.8p this year. This puts the stock on a forecast P/E of 13.5, with a prospective dividend yield of 4.7%.

This level of growth may seem pretty average, but I believe Saga’s focus on developing a closer relationship with its customers should deliver above-average profit growth over the medium term.

To get an idea of Saga’s potential, it’s worth considering last year’s results. The group’s operating margin hit a new record of 22.2%. This resulted in improved cash flow and allowed the firm to increase the full-year dividend by 18%, while still reducing debt.

Annual dividend growth is expected to remain around 10% over the next couple of years, offering shareholders the chance to lock in an attractive yield. In my view, this stock is probably undervalued at current levels. Saga could be a stock to buy and tuck away for the next 10 years.

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. 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.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »