The last year has seen the FTSE 100’s average yield rebound nicely to 4.1% as of the end of March, as embattled miners, banks and oil & gas producers have shored up their balance sheets and boosted dividends. But for investors searching for even higher yields, there are a handful of smaller stocks in the FTSE 250 offering outsized returns.
Outclassing competitors
One that’s very much of interest to me is discount greeting card retailer Card Factory (LSE: CARD) which, in the year to January, paid out 9.3p in ordinary dividends alongside a 15p special dividend per share. Together, these offer shareholders a hard-to-beat 10.4% trailing yield.
Now, management has already said it expects this year’s special payout to be in the 5p-10p range, which suggests a yield nearer to 7% than 10%. But this is still nothing to sneeze at. And at just 12.3 times forward earnings, the company’s stock is sanely valued for such an impressive dividend dynamo.
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This low valuation isn’t without reason, though, as the company’s margins have contracted over the past year as higher input costs — due to the weak pound and increased staffing costs from the national living wage — have raised costs. Rather than pass these costs on to consumers, management has eaten them in the hopes of widening its price-led competitive advantage over higher cost-of-production rivals.
Thus far, this strategy is working with like-for-like sales growth accelerating to 2.9% last year which, together with 50 new store openings, helped boost revenues by 6% to £422.1m. EBITDA over this period did fall from £98.5m to £94m, which is why this year’s special dividend will be smaller. But I think this is a worthwhile short-term price to pay for gaining market share and squeezing rivals who, unlike Card Factory, have higher costs due to not owning their own design and print operations.
With the company still comfortably profitable, generating wads of cash and operating with a very healthy balance sheet with net debt only 1.72x EBITDA, I think Card Factory is a bargain income and a growth stock for long-term investors.
A renewed focus on profits pays off
Another cheap income stock I’m looking at is Tate & Lyle (LSE: TATE), which trades at 11.4 times forward earnings and kicks off a healthy 5% dividend yield. The maker of speciality food ingredients, such as artificial sweeteners and bulk ingredients like corn syrup, has been trading very well of late, with sales for the half year to November up 6% year-on-year to £1,400m. Meanwhile, pre-tax profits leapt up 13% on a constant currency basis to £169m.
This performance was driven by good trading from both main divisions as customers continued to flock to non-sugar sweeteners in developed countries and prices for bulk commodities rose dramatically. Although the prices of bulk ingredients are volatile, the business has made good progress in recent years in driving more demand for the more reliable and higher margin speciality ingredients.
This has helped boost adjusted free cash flow from £92m in H1 2016 to a whopping £151m in the current year’s H1. And with net debt down to £371m at period end and earnings covering dividends roughly twice over, the company’s dividend payouts look very safe with considerable scope to rise. This makes Tate & Lyle one very attractive income share to me.
