Why I’d buy this overlooked dividend stock today after a 15% share price rise

The FTSE 100 (INDEXFTSE: UKX) isn’t the only place to find big dividends. Here are two from smaller stocks I’d buy today.

| 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.

Folks often think ‘big company equals dividends, small company equals growth’. It’s probably a reasonable generalisation, but there are many that don’t fit the equation, and one I’m looking at today is corporate insolvency specialist Begbies Traynor Group (LSE: BEG).

Fellow Motley writer Roland Head has suggested the fallout from Brexit could provide Begbies Traynor with rich pickings as a company that can expect to do well when others suffer. And that could well be true, as a trading update Tuesday sent the shares soaring 15%.

Beating expectations

After a strong final quarter, the company told us “we now expect our revenue and profit for the financial year as a whole to be comfortably ahead of market expectations,” adding that “cash collection in the period was significantly ahead of our expectations, which has resulted in a year end net debt position of £6m.”

Debt is down from £6.3m at the halfway stage which, in turn, had fallen from £6.9m a year previously. That’s pleasingly heading in the right direction and is around the same level as the firm’s annual adjusted pre-tax profits. It’s not something I’d worry about, but I’d be cautious of any future uptick.

Outlook

Executive chairman Ric Traynor said: “We enter the new financial year with a strong order book and favourable market conditions, and are well placed to continue our track record of earnings growth.”

With annual dividends starting to climb ahead of inflation, and this year’s expected yield of 4.2% forecast to rise to 4.6% by 2021, I’m seeing a good long-term income stream here, coupled with a decent prospect for share price growth.

Big dividend

If you want to see a smaller company that’s throwing off cash, look no further than City of London Investment Group (LSE: CLIG). At the first-half stage, the emerging markets specialist announced a special dividend of 13.5p per share, on top of a 9p interim ordinary dividend, after recording a pre-tax profit of £5.2m. At the time, funds under management amounted to $5.1bn.

Cash stream

While it’s perhaps not always wise to rely on special dividends too strongly, the firm has been returning surplus cash to shareholders by such means for some years now. For the full year, City of London Investment is forecast to deliver a yield of 8%, with a smaller but still very attractive 6.8% on the cards for next year.

The firm has also been buying back its own shares, so it clearly seems to think they’re undervalued now. Looking at a forward P/E of 11.7, dropping to 10.8 for 2020, I think so too.

Risky segment?

With emerging markets likely to remain a volatile investing target, I do expect to see City of London Investment shares offering perhaps a rockier ride than some. But though they’ve shown bigger ups and downs than the FTSE 100 over the past five years, they’re happily 55% up over that period and way ahead of the index’s 6.6%.

I’ve always had half an eye on emerging markets, having lived in the East during the Asian Tigers period, and I think we could now be heading for a healthy decade. I’m tempted to invest a little of my pension pot in City of London Investment, but it would be cash I wouldn’t need for at least 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.

Alan Oscroft has no position in any of the 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »