Let’s explore where they could go next and whether I should buy.

Investec: a dividend stock with a solid yield

Specialist Anglo-African banking group Investec (LSE:INVP) has climbed higher than any other FTSE 250 stock over the past year. The blistering 137% growth in the Investec share price hasn’t dented the stock’s passive income appeal. It still yields a healthy 3.7%.

I also like the geographic diversification away from the UK economy that it offers via significant exposure to emerging markets from its Johannesburg operations. At £14.1bn, over 53% of its net core loans are in Southern Africa.

The FTSE 250 bank should also prove resilient in a rising interest rate environment. These factors make Investec stock a great pick to protect my portfolio from the twin threats of a domestic recession and inflation.

On the other hand, credit rating agencies have expressed concerns about rising government debt in South Africa. This could pose a headwind for Investec. Nevertheless, with adjusted operating profit of £377.6m for 2021 and positive forecasts for 2022, the potential risks wouldn’t dissuade me from buying the shares today.

Indivior: a pharma growth stock

Another star performer in the FTSE 250 index is healthcare company Indivior (LSE:INDV). The drug manufacturer’s share price is up by 132% on a 52-week basis and a stunning 585% over two years.

Indivior specialises in opioid addiction treatments. Demand for its products is rocketing due to the opioid problem currently haunting the US. According to the CDC, overdose deaths involving opioids increased by 138% from 2015 to 2021.

Unsurprisingly, Indivior’s financials have benefited. Net revenue increased from $647m to $791m last year, driven primarily by an 88% uptick in net revenue from its extended release injection, Sublocade.

Indivior stock is not without risks, however, demonstrated by its payment of a $600m settlement in 2020 to resolve liability arising from false marketing of its Suboxone Film treatment in Massachusetts, which at one stage threatened to bankrupt the company.

But with its legal troubles in the rear-view mirror and investment in R&D to expand its pipeline into Cannabis Use Disorder treatments, this pharmaceutical company has a bright future, in my opinion. I’d buy.

Drax Group: a FTSE 250 energy stock

Drax Group (LSE:DRX), the owner and operator of the UK’s largest biomass and coal-fuelled power station, has seen its share price almost double over the past 12 months.

Moreover, the company’s adjusted profits rose from £800m to £843m in 2021. Shareholders also benefit from a handy 18.8p dividend per share.

There are clear concerns about investing in a fossil fuel business. However, Drax Group has taken steps to mitigate this.

It is the world’s first energy company to announce an ambition to become carbon negative by 2030. Indeed, the company currently supplies 12% of the UK’s total renewable energy.

Furthermore, there is increasing pressure to diversify away from Russian oil and gas. In this context, I’d buy shares in this homegrown FTSE 250 energy company today.

The post 3 hot FTSE 250 shares that could surge in 2022 appeared first on The Twelfth Magpie.

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Charlie Carman 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.

Operational diversification

In 2016, the firm declared around 70% of the electricity generated came from biomass, which releases more energy for the carbon dioxide emitted compared to coal. Biomass is also classified as renewable because, after harvesting the timber, biomass providers can grow a new crop.

After making some acquisitions over the years, Drax now generates electricity, sells it to business customers, and operates a biomass production business in the Southern USA. The company also announced in 2016 it intends to build four open cycle gas turbine power stations – two in England and two in Wales – and they will begin to come online and start producing in 2021. Natural gas is the most efficient fossil fuel, which should lower carbon emissions compared to alternatives such as coal.

Today’s full-year results report underlines the company is making further progress diversifying from its core Drax asset. In December, the company signed off the acquisition of a portfolio of pumped storage, hydro and gas generation assets from Scottish Power. The directors expect “high-quality earnings” from the new assets.

A flexible producer

Chief executive Will Gardiner explained in the report the firm’s strategy is aimed at becoming a generator of flexible, low carbon and renewable electricity in the UK. The electricity grid in the UK is getting more and more of its energy from renewables such as wind and solar power. And Drax aims to be there producing too, including when the sun isn’t shining and the wind isn’t blowing. Looking forward, the directors see attractive investment options for growth because of expansion in biomass, gas, and cost-reduction projects.

Today’s figures look good. Adjusted Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) rose 9% compared to the previous year and net debt declined by 13% to £319m. The directors expressed their optimism about the firm’s future by increasing the total dividend for the year by 15%.

Earnings, cash flow and the dividend all dipped lower in the last few years, which isn’t surprising given the huge sums of money the company has been ploughing back in to improve operations and to make acquisitions. But I think a more-attractive and better-diversified operation is emerging from the process.

I find it encouraging that the dividend is rising and earnings look set to rebuild going forward. I’m tempted to hop aboard the emerging growth story with Drax and collect that expanding dividend, which is predicted to yield about 4.3% in 2019 at today’s share price close to 367p.

The post Why I’d buy shares in this up-and-coming FTSE 250 power producer today appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any share 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.

But while this market-beating dividend yield might look attractive, I’m not a buyer of the Centrica share price. I think there are plenty of other dividend stocks out there with brighter outlooks. Today, I’m looking at one of these opportunities.

Losing money

Shares in Centrica might look attractive today, but the company’s record of creating value for investors is, quite simply, terrible. 

Over the past 10 years, shares in the company have returned just 0.25% per annum, including dividends, which implies you would have been better off keeping your money in a savings account rather than owning the shares. Over the past five years, Centrica’s performance is even worse. Including dividends, the stock has returned -10.5% per annum since January 2014 (although it has outperformed in 2018). 

By comparison, the FTSE 100 has returned 3.9% per annum for investors (over the past decade, the UK’s leading blue-chip index has returned 8.3% per annum).

Performance issue 

Centrica has been dogged by a series of performance issues over the past 10 years, and it doesn’t look as if it’s going to get any easier for the company anytime soon. The government’s price cap is almost certain to hit profitability, and the business is losing hundreds of thousands of customers to competitors. 

Analysts expect Centrica’s earnings per share (EPS) to drop a staggering 51% for 2018 to 12.3p. Only a small recovery is expected in 2019. Based on these figures, even though the shares have declined nearly 50% over the past two years, they still don’t look particularly cheap. Indeed, at the time of writing, shares in Centrica are trading at a forward P/E of 11.

A better buy? 

Considering the above, I’m in no rush to buy Centrica. The company’s yield might look attractive, but I think the shares could fall further if earnings continue to deteriorate.

With this being the case, I reckon Drax (LSE: DRX) could be a better income buy. Shares in this power station owner yield 4.8%, according to City forecasts for 2019, which looks disappointing compared to Centrica’s 8.9% distribution. 

However, analysts have pencilled in EPS growth of 183% for 2019, as the firm’s recent acquisition of a portfolio of power generation assets from the Scottish Power Generation Group starts to yield results.

Predictable business

I reckon Drax is also a better investment than Centrica because the company doesn’t have to compete for customers. Power generation is a relatively dull and commoditised business, and demand should only grow going forward.

What’s more, Drax doesn’t have to worry about enticing retail customers and dealing with complaints. The enterprise also has more scope to expand, because setting up power plants is highly regulated and costly, so Drax has few natural competitors. By comparison, setting up an retail supply energy business to compete with Centrica is relatively easy.

That’s why I think Drax is the better income buy, despite its lower yield. The company has more scope to grow, and I reckon its dividend is more sustainable as a result.

The post Forget the Centrica share price, I’d buy this 4.8% yield instead appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

However, what we do know is that the best way for investors to protect against uncertainty is to focus on finding good, cheap income stocks. 

So today I’m looking at two stocks in the FTSE 250 index that I believe have fantastic dividend credentials.

Slow and steady

Power plant owner-operator Drax (LSE: DRX) might not be the most exciting company around, but I believe the group’s business makes it immune to market uncertainty. 

To add to its portfolio of power assets, today Drax announced that it is spending £702m to acquire Scottish Power’s portfolio of pumped storage, hydro and gas-fired power generation assets. The portfolio includes the vast Cruachan hydro facility in the Scottish highlands, which should further reduce the group’s exposure to legacy fossil fuel projects. 

This isn’t the only low-carbon initiative the company is pursuing. Over the past few years, Drax has become a UK leader in the supply and use of compressed wood pellets for generating power. These are generally considered to be a more environmentally friendly fuel for power generation. The firm is aiming to have converted all of its coal-fired plants to wood pellets by 2025. 

As management has pushed through these changes, Drax has struggled to remain profitable, but it looks to me as if the company has now pulled through this challenging period. The City is expecting a net profit of £36m for 2018 rising to £95m for 2019, based on these numbers, the stock is trading at a forward P/E of 15.7. I think this is an appropriate multiple to pay for a business that is as defensive as Drax. 

On top of this, analysts have the company yielding 4.5% in 2019. These numbers all lead me to conclude that there is a buying opportunity here.

Family business

Alongside Drax, I’m also interested in AG Barr (LSE: BAG). It is one of the few companies left on the market where the founding family still owns a percentage of the business and has a hand in the day-to-day running of the enterprise, which in my opinion makes it the perfect investment for long-term defensive investors. 

Research has shown that family firms tend to perform better over the long run because they are not distracted by short-term market changes. These companies invest for the long term, with the desire to achieve the best outcome for the next generation of owners. 

Outside shareholders might not be part of the family, but this does not mean they’re left wanting. For example, AG Barr has one of the best dividend records around. It is debt-free and has grown or held the dividend every year since the late 90s. 

Considering this record of reliable dividend growth, it is no surprise that while the rest of the market fell last week, shares in AG Barr only pushed higher. With a dividend yield of 2.1%, I reckon this drinks business would make a great addition to any portfolio.

The post These 2 FTSE 250 income champions could protect your portfolio from the market slump appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

And here’s the thing to remember about Centrica and other energy suppliers: the sector is battling against the looming price cap on energy tariffs and faces fierce competition from smaller rivals. With dividend cover for many utility companies at historically low levels, further profitability pressures could undermine the sustainability of their dividends.

No imminent danger

Still, Centrica is not in any imminent danger. Despite a 17% decline in adjusted operating profits for 2017, the company maintained its full-year dividend at 12p per share. It also expects to maintain the current dividend level, subject to it generating annual adjusted operating cash flow within its target range of £2.1bn-£2.3bn and net debt remaining within £2.25bn-£3.25bn.

The company’s financial flexibility is underpinned by its sector-leading balance sheet, which has been bolstered by recent disposals in its upstream and power generation assets. Centrica is also in the midst of a major strategic repositioning, with plans to double down on its customer-facing businesses.

Its leading position in the UK energy supply and services market gives the company a competitive advantage over its rivals. There’s a huge growth opportunity to be seized in the market for smart home devices, which should expand and deepen relationships with households.

Uncertainty remains

Nevertheless, its turnaround prospects needs to be viewed in the context of the challenging trading conditions in the sector. My guess is that the combination of political and regulatory uncertainty will keep the firm’s valuation pegged low in the future, with limited opportunity for the company to deliver any significant earnings growth in the medium term.

What’s more, Centrica’s very high yield of 8.4% tells us that investors are worried about the safety of its dividend. There’s certainly a lot to gain if its turnaround is properly implemented, but the road ahead will likely be a rocky one for investors.

A better buy?

Investors looking for safer dividends should instead consider power generation firm Drax Group (LSE: DRX).

The company seems further along in its transformation plan to shift its focus away from dirty coal towards greener sources of power, such as biomass and gas. Its financial performance in 2017 showed a marked improvement versus the prior year, with all areas of the business contributing to positive EBITDA for the first time.

Drax has also worked hard to shift its reliance on power generation, through an expansion in its business energy supply ops and the on-boarding of Opus Energy. Looking ahead, it intends to play a vital role in helping change the way energy is supplied, with plans to build 200MW of battery storage at the Drax Power Station.

Near fivefold increase in its dividends

Already, Drax’s turnaround is delivering growing cash flows and its rapidly increasing dividends look enticing to me. Following a near fivefold increase in its full-year dividends per share to 12.3p, shares in the group look set to yield 4.6%.

The post Can 8%+ yielder Centrica plc provide a safe source of income? appeared first on The Twelfth Magpie.

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Jack Tang 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.

The coal-to-biomass power generation group says that EBITDA earnings will be £10m lower than expected this year, due to “an unplanned outage on the rail unloading facilities”. This outage is restricting supplies of biomass fuel, and means that two generating units will have to be shut down temporarily. Management expects operations to resume in January.

A potential value buy

To put this news in context, Drax generated EBITDA of £121m during the first half of 2017. So a £10m shortfall across the whole year is disappointing, but certainly not a disaster.

The power company’s shares have only fallen by around 5% so far today, suggesting the market shares my view. So are the shares worth buying at current levels?

After today’s drop, Drax shares trade at a 27% discount to their net tangible asset value of 363p per share. They also offer a tempting yield of 4.7%, although this isn’t expected to be covered by earnings.

From a value perspective, these shares seem to have potential. What’s prevented me from investing myself is the group’s weak profitability. Drax is targeting EBITDA of “over £425m” by 2025.

The group hopes to earn this from a blend of biomass supply, power generation and energy retail to homes and businesses. This may be possible, but it requires the Selby-based firm to nearly double its earnings in eight years. I’ve no way of knowing how realistic this is, so I remain undecided about Drax.

A 6.7% yield I’d buy

One of Neil Woodford’s more recent buys is housebuilder Taylor Wimpey (LSE: TW). I can certainly see the attraction of this stock, which has a growing cash pile and offers a 2017 forecast yield of 6.7%.

The main risk seems to be that the housing market should crash at some point, crushing builders’ earnings. Although I do expect a slowdown, my hunch is that this may not happen anytime soon.

While the government continues to subsidise the housing market with the Help to Buy scheme, I suspect prices may remain stable at levels which would otherwise be unsustainable.

Taylor Wimpey’s latest half-year results certainly seem to suggest that the market has remained strong in 2017. During the six months to 30 June, the firm completed 6,580 homes, 9.3% more than during the same period last year. The average selling price rose by 6.3% to £253k, lifting the group’s adjusted operating profit by 24% to £346m.

An unmissable income buy?

The group’s net cash balance rose from £364m to £429m during the first six months of the year. Much of this cash will be returned to shareholders next year in a planned special dividend of £340m.

In total, Taylor Wimpey plans to return £1.3bn (39.7p per share) to shareholders between 2016 and 2018. “Further material capital returns” are planned from 2019 onwards.

Earnings per share are expected to rise by around 8% to 20.9p in 2018. This should provide solid cover for the forecast dividend of 15.1p per share, which gives a yield of 7.3% at current prices. In my view, the shares are probably still worth buying.

The post One Neil Woodford dividend stock I’d avoid and one I’d buy today appeared first on The Twelfth Magpie.

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Roland Head 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.

Over the past 12 months, shares in outsourcer Interserve (LSE: IRV) have chalked up a loss of 78% making the company one of the worst-performing large-caps this year. 

In fact, over the past three years, the decline has been so severe that the company’s market value has fallen from over £1bn to just over £100m today. However, despite this drop, the stock looks cheap based on City estimates for growth.

Unlike other companies that have seen their market values decline by 91% in three years, analysts believe Interserve remains profitable and is set to earn an estimated £52m in pre-tax profits for 2017, followed by £62m for 2018. Based on these figures, the shares are trading at a forward P/E of 1.9 for 2018. 

Too cheap to pass up? 

The current low valuation could be too cheap for some value hunters to pass up. Indeed, if the shares recovered back to a multiple of 8.7 (the five-year average), according to my figures, they would be worth 304p, 353% above current levels. 

Nonetheless, despite the value on offer here, I’m not interested in Interserve. Only a few months ago the firm warned that it faces a “realistic prospect” it will breach its banking covenants following a further deterioration in trading during the third quarter. 

After this warning, management declared that the group said it had launched a “comprehensive contract review across both the support services and construction businesses,” which will likely result in the business exiting non-core contracts. This leads me to believe that while City estimates for growth look attractive today, they could be downgraded significantly in the months ahead as Interserve engages in damage limitation. If the company does indeed breach its banking covenants, then a rights issue may also be on the horizon.  

So overall, I think Interserve is a sell. A better buy for your portfolio might be power group Drax (LSE: DRX), which is set to return to growth in the years ahead. 

Capital spending starting to yield results

Over the past few years, Drax has transformed itself. The power-generation group has overhauled its portfolio converting its old coal-fired power plants to greener wood biomass pellets. Three of the six plants have already been converted with a fourth in progress. As well as these, it is planning to build a new gas-fired station and one of the most prominent battery storage facilities in the world. These efforts are designed to enable it to provide a more flexible, greener energy source for the 21st century.

This transformation has come at a price, however. The group’s earnings have declined over the past five years from 52p in 2012 to an estimated 2.1p for this year. 

2017 is expected to be the low point for the company, based on earnings forecasts. Next year growth is expected to return with earnings per share slated to expand by 320% to 9p. A trading update from the firm issued today confirmed that it is on track to hit this target. As earnings recover, analysts expect management to rekindle dividend growth. A payout of 14.2p is projected for 2018 giving a dividend yield of 5.4% on the current price. 

All in all, Drax looks to me to be the better buy as its growth picks up over the next few years while Interserve struggles to remain solvent.

The post Why I’d dump Interserve plc to buy this cheap 5% yielder appeared first on The Twelfth Magpie.

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Rupert Hargreaves does not own any share 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.

Today I’m going to look at two FTSE 250 companies that are both trading at big discounts to their net asset values. As we’ll see, I believe gains of 50% or more could be possible on both stocks.

A power play

Power generation specialist Drax Group (LSE: DRX) is working hard to leave its coal-fired past behind and become a more diverse business, built around renewables.

The company now generates 63% of its power by burning renewable wood pellets, rather than coal. Drax has also acquired a gas generation company and is building a business which sells energy directly to business customers. In my view, the group is becoming more like a regular big utility.

I’d expect a business like this to trade above its book value. However, although Drax shares rose by 20% last year, they currently trade at a 34% discount to their tangible book value of 494p per share.

Drax stock would have to rise by 52% from its current level of 325p in order to trade in line with its book value.

This could be an opportunity

I don’t expect its share price to rocket up to 494p overnight. As things stand, the group’s profits aren’t high enough to justify such a valuation, in my view.

However, when sound companies trade at a discount to their book value, it’s often an indicator that a future re-rating is likely when profits recover.

Drax’s adjusted earnings are expected to rise by 148% to 12.4p per share this year. A further increase of 47% is pencilled-in for 2018. These figures put Drax stock on a forecast P/E of 26, falling to a P/E of 18 in 2018. The shares also offer a prospective yield of 2.5% for 2017, rising to 4.4% in 2018.

If Drax can deliver on these forecasts and maintain this momentum, then I think the shares are likely to rise further. Drax has gone onto my watch list as a potential value buy.

A luxury bargain?

FTSE 250 hotel operator Millennium & Copthorne Hotels (LSE: MLC) operates about 125 upmarket hotels in top destinations such as New York, London and Singapore. Around half of these are owned or leased, while the remainder are managed or franchised.

Millennium’s stock currently trades at 441p. That’s a discount of 55% to the group’s net asset value of 976p per share. Although property groups often trade at a modest discount to their net asset value, this seems excessive to me given that the group appears to be in reasonable financial health.

Admittedly M&C is facing some headwinds. Underlying revenue per room fell by 2.3% last year. Costs are rising and room rates are falling. Only the weaker pound helped boost the firm’s reported profits last year.

The group’s growth may yet come under more pressure. But the balance sheet still looks quite safe to me, with net debt of £707m representing just 17% of the value of properties and investments.

Although the short-term story looks uncertain, I believe that the stock’s big discount to book value suggests that the long-term view is more positive.

The post 2 FTSE 250 stocks that should be worth 50% more appeared first on The Twelfth Magpie.

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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.

One such opportunity is power station owner Drax (LSE: DRX). 

Contrarian buy 

In a recent interview, Woodford admitted that his fund added to its existing position in Drax during February, after the company’s recent stock declines. 

Following a number of profit warnings, Drax has fallen out of favour with the wider market during the past two years. The company, which runs the UK’s largest wood pellet-fired power station, has been hit hard by the government’s flip-flopping on energy policy and the removal of green energy subsidies. As a result of these changes, Drax’s earnings per share have slumped by 90% from 52p per share in 2012 to 5p for 2016. 

As earnings have crashed, so has the company’s share price. Since the beginning of 2014, shares in Drax have declined by 60%. But it seems Woodford senses value here. Drax is currently trying to reduce its dependence on power generation and recently acquired a business energy supplier. Thanks to this acquisition, City analysts have pencilled-in earnings per share growth of 160% to 13p this year and a further 45% to 18.9p for 2018. These are impressive growth rates, but even if the firm hits these high targets, the shares will still look expensive. 

Earnings per share of 18.9p suggest a forward P/E multiple of 17.3 for 2018. Considering Drax’s past, it does not seem wise to pay such a high multiple for the shares. 

Blue-sky buy 

Alongside Drax, Woodford also revealed in the interview that he had been buying shares in Mercia Technologies (LSE: MERC) and Homeserve (LSE: HSV) over the past two months. 

Mercia is an investment company with the goal of generating capital growth for shareholders in the creation, funding, incubation and development of technology businesses. It is a venture capital business, working on behalf of investors in businesses it believes have the potential to change the markets they operate within. 

This operation, which is similar to many of Woodford’s other venture capital style-businesses, recently won two contracts to manage funds associated with the UK government’s Northern Powerhouse scheme. The contracts include a £57.5m equity fund and £51m debt fund under the control of the state-owned British Business Bank. 

These deals show that Mercia is clearly an important business with connections in all the right places. If you have a high risk-tolerance, this could be a share for you. 

Growth buy 

Meanwhile, year-to-date shares in Homeserve have lost nearly 10% of their value. However, even after these losses, the shares look expensive trading at a forward P/E of 21.5 for the year ending 31 March 2017. Next year City analysts have pencilled-in earnings per share growth of 18% to 30.5. If the company can keep this growth up, it could be a solid long-term growth buy. The shares support a dividend yield of 2.6% while you wait. 

The post Should you follow Neil Woodford into these 3 stocks? appeared first on The Twelfth Magpie.

More reading

• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Homeserve. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

I have to admit that the attractions of this company haven’t always been clear to me over the last couple of years. In this article I’ll take a closer look at last year’s figures and at the firm’s plans for diversification.

I’ll also consider an alternative utility stock, which I believe is well-positioned to provide a generous dividend yield.

Drax diversifies but profits halve

UK government policy is for coal-fired power stations to be phased out by 2025. To avoid being forced out of business, Drax has already converted three of its generating units to burn wood pellets. In 2016, 65% of power generation came from biomass fuel, up from 43% in 2015.

The firm’s financial figures were less impressive. Underlying earnings fell from £46m to just £21m, which equates to 5p per share. The group’s dividend was cut by 56% to 2.5p, giving a yield of just 0.7%.

However, cash generation was good and Drax managed to reduce net debt by 50% to just £93m, while still investing in diversification.

Drax recently paid £340m to acquire energy supplier Opus Energy. Opus will work with Drax’s existing Haven Power business to expand the group’s market share of the business energy supply sector.

Four open cycle gas turbines have also been acquired at a cost of £18.5m. Drax plans to develop four new gas plants around these turbines in order to provide rapid response power. This will be used to fill gaps in the UK’s electricity supply — for example when renewable output from wind power falls short of demand.

Is Drax a buy?

Perhaps the most important statement in Drax’s results was that 2017 earnings are expected to be in line with current market expectations.

This implies that earnings will rise to 17p per share this year. The group’s 50% payout ratio suggests that a dividend of about 8.5p per share is likely, giving a yield of about 2.4%.

I have to admit that I’m not totally convinced. But if you are attracted to the group’s increasingly diverse business, then now might be a reasonable time to consider buying.

I’d rather have a 5% yield

British Gas owner Centrica (LSE: CNA) is an obvious alternative to Drax. It makes money from energy supply, power generation and oil and gas production. Centrica’s ownership of British Gas means that it often gets bad press, but in my view the stock looks reasonably priced and quite attractive at current levels.

Centrica was forced to cut its dividend in 2014 and 2015. That’s not ideal for an income stock, but the dividend now looks much more affordable and sustainable.

Centrica shares currently trade on a P/E of 14.5 and offer a prospective yield of 5.2%. Earnings are expected to rise by 3.7% in 2017. But broker consensus forecasts have been climbing steadily over the last three months.

I suspect that if the recovery in the oil market continues during the second half of 2017, Centrica’s profits could be higher than expected this year. Even without this potential attraction, I’d rate this stock as an income buy in today’s market.

The post 2 dividend stocks that could help you retire early appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.