These FTSE 250 income stocks trade on rock-bottom earnings multiples. Could they be great ways for investors to boost their passive income at low cost?
Marks and Spencer Group
Clothing and food retailer Marks and Spencer (LSE:MKS) hasn’t paid a dividend for the last couple of years. But City analysts are expecting it to restart its payout policy from the current financial year and to raise shareholder rewards rapidly thereafter.
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A total dividend of 4.5p per share is forecast for the financial year to March. This results in a decent starting yield of 2.8%.
Trading at the company has been more impressive of late — like-for-like sales rose 7.2% in the December quarter — and its drive to become a multichannel operator could help it sustain this momentum and deliver long-term growth.
In January, it announced a £480m plan to overhaul its store network to embrace the opportunities of e-commerce. This would include the creation of 20 new larger stores that might help the company exploit the ‘Click and Collect’ boom.
But I don’t yet believe M&S is a good choice for income investors. As the economy splutters and high inflation persists, the outlook for profits and dividends remains highly uncertain.
Latest data on food inflation from the British Retail Consortium makes for worrying reading. This showed annual price rises sped up to 14.5% in February, from 13.8% the previous month. The rising cost of essentials leaves little left over for shoppers to spend on clothing and homewares.
I’m also concerned about M&S’s ability to generate solid investor returns as competition in the clothing sector heats up. This has the potential to put revenues and margins firmly on the back foot again.
On balance, I think investors should swerve buying the retailer’s shares. Not even a low forward price-to-earnings (P/E) ratio of 10.7 times is enough to change my mind.
Redrow
Housebuilder Redrow (LSE:RDW) looks like a far more attractive dividend stock to me. And it’s not just because it provides better all-round value that Marks & Spencer, at least on paper.
For the financial year to June, it trades on a P/E multiple of just 6.2 times. Its corresponding dividend yield meanwhile sits at 5.6%, sailing well above the 3.1% average for FTSE 250 shares.
I think Redrow’s long-term outlook is far more reassuring than the aforementioned retailer. Britain has a huge homes shortage that looks set to worsen as weak build rates persist and the population grows.
That doesn’t mean I’d buy the company’s shares for passive income however. This is because the housing market is locked in a downturn that could damage dividend levels during the short to medium term. Redrow’s own order book fell £400m year on year to £1.1bn as of 1 January.
Latest Nationwide data showed average home prices fell 1.1% last month, the biggest dip in over 10 years. Buyer demand is weak and could remain so as interest rates continue rising and the economy worsens.
I believe Redrow could deliver big returns over the next decade. It’s why I continue to hold several FTSE 100 homebuilders in my portfolio. But I think investors could be better off buying other dividend shares for market-beating income this year.
