Understandably, most private investors gravitate towards the biggest and best-known companies (think Lloyds Bank, Royal Dutch Shell and GlaxoSmithKline), either through buying their shares directly or by purchasing a fund that focuses on holding a selection of these giants.

Today, however, I’ve picked out two far smaller businesses that not only have great income credentials but also, I suspect, offer the possibility of decent capital growth.

Focused on 2020

Based on recent trading, you might wonder why I’m positive on “image capture and content creation solutions” provider (that’s camera accessories, supports, prompters, monitors and lighting to you and me) Vitec Group (LSE: VTC).

Results for the first half of 2019 weren’t particularly inspiring. The US/China trade war and “some disruption to the photographic market” left revenue pretty much flat at £184.2m compared to the previous year. Pre-tax profit fell almost 16% to £16.6m and net debt increased to £108.4m from £43m, partly as a result of acquisitions.

In spite of this, it’s important to highlight that Vitec made no changes to its FY19 guidance. At 14%, adjusted operating margins also remained decent and in line with the company’s mid-teens-digit target.

By far the biggest positive in my view, however, was the fact that wireless chip maker Amimon (purchased in November last year) has now been fully integrated. This means Vitec’s plan to launch wireless video products into the broadcast sports market next year is on track. This development, coupled with the company being heavily involved with the Tokyo Olympics (as well as the US Election), leads me to suspect that the current valuation of 14 times earnings could turn out to be rather cheap by next year.

And the dividends? The 3.1% yield might appear very average, but it’s been consistently hiked over the years — exactly what those looking for regular income should be searching for. What’s more, this year’s cash returns should be covered well over twice by profits.

Galloping dividends

A second stock that I think warrants further investigation is RM (LSE: RM) — a company that supplies products and services to education markets, both here and abroad. 

This small-cap’s shares have been in excellent form over the last 12 months, rising a little over 50%. Based on July’s interim results, I think there could be more good news ahead.

Although revenue rose only 1% (to £95.5m) thanks to “a difficult UK schools market“, international sales rose 33%. Adjusted operating profit also jumped 17% to £9.7m, helped in part by improvements in RM’s Results and Education divisions. Margins rose to 10.2% from 8.8% and net debt dropped by £2.2m to £21.2m. Lots of good numbers there.

The great thing about all this is that RM’s shares can still be picked up for just 11 times expected earnings. Considering the company generates high returns on capital employed on a consistent basis, that looks rather cheap to me. 

Like Vitec, RM’s 3% yield isn’t exactly worth writing home about on its own. Look underneath the bonnet, however, and you’ll discover that the business has doubled its total cash return since 2013 and is expected to grow this amount by another 10% in FY20. Forget the sky-high yielders elsewhere in the market — this is what should get dividend hunters salivating.

The post Looking for dividends? I think these secret small-cap stocks look great value appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Vitec Group. 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 well-known share research website classifies some shares as super stocks. To qualify, a share must score well against value, quality and momentum indicators. I think picking shares like that can be a decent strategy. Here are three of my favourites right now.

Infrastructure investment

3i Infrastructure (LSE: 3IN) is a closed-ended investment company that invests in infrastructure businesses and assets in the UK and Europe. The company aims to deliver shareholders a sustainable total return of 8-10% per annum, with some of that coming from its progressive dividend policy.

A glance at the share price chart reveals the stock has been moving steadily up for some time, which I find encouraging. At the recent 287p, the share price is just over 30% higher than it was a year ago. But even now, the valuation isn’t excessive with the forward-looking price-to-earnings multiple for the trading year to March 2020 running just below 13. There’s also a dividend yield sitting a little over 3%.

The company manages its assets in sectors such as transportation, power, utilities, energy and healthcare, buying and selling businesses and investments at optimum times. I think such nipping and tucking looks set to keep the total returns rolling in for shareholders in the coming years.

Credit lending

Morses Club (LSE: MCL) is a UK-focused, home-collected credit lender operating via a network of self-employed agents who collect repayments on the doorstep on a weekly follow-up basis. The firm provides non-standard credit, which is usually unsecured, for borrowers who have difficulty obtaining credit from mainstream lending institutions.

At 175p, the stock has risen a little over 10% since the beginning of the year, which is a handy return when combined with the forward-looking dividend yield of almost 5% for the trading year to February 2020. City analysts following the firm expect double-digit percentage advances in earnings and in the dividend for the current trading year. And the directors expressed a confident outlook with an update at the end of February.

Meanwhile, the valuation looks undemanding with the forward-looking earnings multiple running just below 12 for the current trading year. I think the shares are attractive.

Education services and products

RM (LSE: RM) supplies products and services for the education market in the UK and abroad. At the end of March, the company released a steady-as-she-goes trading update and City analysts following the firm expect single-digit increases in earnings and the dividend going forward.

At 231p, the stock is around 14% higher than it was at the start of the year. The forward-looking dividend yield is also running just below 4% for the trading year to November 2020. But the dividend is a real success story. Over five years, the payment has increased by just over 100% and I think the firm is capable of delivering a similar return from the dividend in the years to come.

Meanwhile, the valuation looks undemanding with the forward-looking earnings multiple running just below nine for the trading year to November 2020. That looks attractive to me, given the sector has defensive qualities.

The post 3 ‘super stocks’ I’d snap up for my Stocks and Shares ISA appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

In other words, if I save in a cash ISA, I’m going to lose money after adjusting for the eroding effect of inflation.

Why shares could be better

So instead of saving cash, I’d rather invest in dividend-paying shares. Dividends from many listed companies are much higher than the rates paid by cash ISA accounts and, on top of that, many firms raise their dividend payments each year too – you don’t get that benefit from a cash ISA!

One example of a stock that looks attractive to me right now is education products and services supplier RM (LSE: RM). At the recent share price of 240p, the dividend yields around 3.2%, which knocks the spots of any cash ISA. But the best bit is that the dividend payment has increased by more than 120% over the past six years. If that growth in the dividend continues, you could earn a handsome return by investing in the company’s shares from the dividend payments alone.

However, it gets even better. A rising dividend like that tends to take a share price up with it to reflect the value building in the underlying business, and RM’s share price has risen by more than 200% over the previous six years as the dividend has been growing. So, if you’d invested in RM six years ago you’d have more than three times the money you originally invested by now.

It sounds easy, doesn’t it? But there is a catch. Investing in shares carries more risk than investing in cash accounts. There is the risk that the underlying business behind a share may not go on to perform as well as we expect it to. You could even lose money by investing in shares if things go wrong for a company. But I reckon those who invested in RM six years ago are glad they did. I think the key to successful investing outcomes is to keep a close eye on the trading updates and financial reports that a firm issues and today’s full-year results report from RM is encouraging.

Strong trading

The company has been doing well. In the trading year to 30 November 2018, revenue rose 19% compared to the year before and adjusted diluted earnings per share shot up 22%. The balance sheet strengthened during the year with net debt falling almost 57% to £5.8m suggesting that cash is flowing into the business to back up the firm’s profits. The directors expressed their confidence in the outlook by pushing up the all-important total dividend for the year by a whopping 15%, which is a great outcome for existing investors.

The year’s progress came from organic growth and from a previous acquisition that the company integrated during the year. All three divisions made strong progress in the period and I feel confident that the company’s finances are in good shape. Meanwhile, the shares are changing hands on a forward-looking earnings multiple for 2019 of just under 10, which looks like good value to me.

The post Forget a cash ISA! I’d buy this dividend-growing stock for my retirement portfolio appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold 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 business held in high regard by fund manager Neil Woodford is subprime lender Provident Financial (LSE: PFG). Woodford’s funds have a 25% stake in this firm, which can trace its history back to 1880.

Although the company has diversified into online lending and credit cards, doorstep lending remains at the core of the business. This division went through a difficult period in 2017, when plans to bring self-employed collection agents in-house went badly wrong. But the firm’s recovery seems to be going well and chief executive Malcolm Le May has promised a return to regular dividends in 2019.

The market remains cautious about this business and Provident’s share price is still nearly 70% lower than it was two years ago. As a result, the shares offer a forecast dividend yield of almost 7% for 2019. I think this could be a buying opportunity.

High returns, low valuation

Provident is expected to generate earnings of 51p per share in 2018, rising by 26% to 64p in 2019. This puts the stock on a 2018 forecast price/earnings ratio of 11.9, falling to a P/E of 9.4 in 2019.

That seems cheap to me for a business that has historically generated a return on equity of more than 30%. This measure of profitability is widely used for financial stocks and compares a company’s profit with its net asset value. A high return on equity (RoE) generally indicates good cash generation, supporting dividends and growth.

Using analysts’ forecasts as a guide, my sums suggest an RoE of 17% for 2018, and a higher figure for 2019. At current levels, I’d rate the shares as a long-term buy.

This small-cap is beating forecasts

Shares of education services supplier RM (LSE: RM) are up by 10% at the time of writing after the firm said that full-year profits should be “slightly ahead of expectations.”

RM’s share price has fallen by more than 15% since early July as the Brexit sell-off has hit the stock market. But the company’s performance has remained strong, as today’s statement confirms.

The business has three main divisions: Resources, Results and Education. These supply teaching aids and curriculum resources, electronic testing services, and IT systems for schools.  

Chief executive David Brooks says that all three divisions have delivered a “positive performance” and that the group’s net debt fell by £7m to just £6m last year.

The group’s interim results in July showed that sales rose by 33% to £94.9m during the six months to 31 May, while adjusted operating profit climbed 27% to £8.3m. These figures were boosted by the acquisition of The Consortium, a rival educational supplies business formerly owned by Connect Group.

This deal seems to have worked out well, so far. However, this autumn’s sell-off has left RM stock trading on just 8.5 times 2018 forecast earnings, with a dividend yield of 3.8%. I think that may be too cheap to ignore, and would rate the stock as a buy.

The post Is this Neil Woodford-owned 7% dividend stock today’s top FTSE 250 buy? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

Indeed, over the period, the shares have returned 100% excluding dividends. Including dividends, shareholders have seen a return of 125%.

And it looks as if these returns are set to continue as today the company announced, alongside its final results for the period ending 30 November, a 25.9% increase in adjusted diluted earnings per share and a 10% increase in the proposed full-year dividend of 26.6p per share. 

Successful year 

This dividend hike follows a healthy year for the supplier of technology and resources to the education sector. Overall, revenues for the period increased by 11% to £185.9m and adjusted operating margins increased from 11.2% to 11.9%. These operational improvements helped the company deliver adjusted operating profit growth of 17.4%. 

RM’s performance received a substantial boost in the year after the company acquired the education & care business of Connect Group plc for £59m. The acquisition contributed revenues of £27.8m for the period. Even though the group did borrow to acquire this growth, robust cash generation is already allowing it to pay off creditors. Before the acquisition, RM’s net cash balance was £40m. By year-end, net debt had fallen to £13.4m implying a reduction in net debt of £5.6m over the past few months. 

Going forward City analysts are expecting further growth from the company. Following this year’s strong performance, earnings per share growth of 9.1% is projected for 2018 indicating that the shares are trading at a discount forward P/E of only 8.3. A market-beating dividend yield of 4.3% is also on offer. 

So overall, if you’re looking for a cheap growth stock with a dividend growing at a double-digit percentage every year, RM could be the company for you. 

Changing with the times

Another dividend stock that’s on my radar today is NAHL (LSE: NAH). This personal injury-focused law firm has fallen out of favour with investors over the past few years, due to government attempts to clamp down on the sector. However, management has been trying to diversify, and so far this strategy is succeeding, with the group’s critical care division and residential property arm producing steady results.

These efforts are expected to help the company continue to grow in a harsh environment. Over the next two years, City analysts expect revenues to expand by around 9%, although net profit is expected to slide by 25% over the same period. 

Still, NAHL’s discount valuation and high-single-digit dividend yield more than make up for this earnings decline. The shares currently trade at a forward P/E of 9.3 and support a dividend yield of 7.3%. The payout is covered 1.5 times by earnings per share, and the group has a relatively stable balance sheet with net gearing of just 16.2%, leaving plenty of room for manoeuvre. 

It could also be the case that City expectations for the company’s outlook turn out to be too pessimistic. Indeed, only a few weeks ago the firm announced to the market that trading during the fourth quarter had exceeded expectations and, as a result, earnings for the full year would beat City estimates. With this being the case, I’m optimistic about NAHL’s future.

The post 2 monster dividend stocks I’d buy and hold today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

The group now says its full-year results should be “ahead of expectations”. Although management hasn’t see fit to provide any figures for guidance, I’d expect this to mean that earnings are likely to be 5%-10% higher than consensus forecasts.

If that’s the case, then RM could report adjusted earnings of about 20p per share this year. At the last-seen price of 185p, that would still leave the stock on a modest forecast P/E of 9.3.

Should you rush in and buy?

RM’s last move higher came in February, when it announced the acquisition of Connect Group‘s educational business. This £56.5m deal was quite significant for the group, as the Connect business appeared to have the potential to add around 40% to full-year sales.

The integration of this business appears to be going well. RM said today that expected cost savings are likely to be greater than the £2m originally expected. Trading is also said to have been solid across the group’s other businesses.

Looking ahead

Analysts expect earnings to rise to 21.5p per share in 2018/19, as the full benefits of the Connect acquisition flow through to the bottom line. This puts RM stock on a modest forecast P/E of 8.6, with a prospective dividend yield of 4.4%. I’d continue to rate this stock as an income buy following today’s news.

A 7% yield I trust

A dividend yield of 7.9% without full earnings cover would normally be a cause for alarm, signalling a likely dividend cut. But before dismissing companies with high yields, it’s often work taking a look at the figures.

Just occasionally, these generous payouts can be affordable. In my view, payment processing group PayPoint (LSE: PAY) is a good example of this.

The firm’s recent half-year results showed that profits remained stable during the first half, despite a slight fall in revenue. Underlying operating profit was broadly flat at £24.4m, while operating cash flow — crucial to dividends — rose by 5.3% to £29.5m.

This business has always generated a lot of surplus cash, and these figures suggest to me that this attraction remains.

Although the group’s forecast full-year dividend of 71.4p per share isn’t covered by expected earnings of 62p per share, I expect most of this payout to be covered by free cash flow. The remainder will be funded from the group’s net cash balance of £27.6m, which is gradually being returned to shareholders.

A pure income buy?

The outlook for growth here looks limited. But PayPoint handles a wide range of payments through its corner shop terminals, and in my view this business is likely to have a stable future.

The stock currently offers a forecast yield of 7.8%, rising to 8% for the 2018/19 financial year. As the group’s cash balance falls, these payouts may eventually be cut so that they’re covered by earnings. But even then, I’d expect a yield of around 5%.

I believe this stock has the potential to deliver a 20% cash return in three years. I’d rate the shares as an income buy.

The post 2 dirt-cheap dividend stocks that could make you brilliantly rich appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head owns shares of RM. The Motley Fool UK owns shares of PayPoint. 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.

Improving outlook

For the fiscal year ending 30 June 2018, South32 is projected to report earnings per share of 17.3p giving a forward P/E of 10.3 at current prices. According to City figures, the shares offer a yield of 4%, and the payout is covered twice by earnings per share, giving plenty of room for payout growth. Thanks to rising commodity prices, analysts have more than doubled their earnings projections for it over the past year, and if prices continue to expand, I would not rule out further revisions. 

What’s more, compared to peers such as BHP and Rio Tinto, South32 looks to be undervalued by as much as 50%. Indeed, at the time of writing, shares in BHP currently trade at a forward P/E of 15.5, and Rio trades at a forward P/E of 12.8. 

Secure assets 

Shares in Berkeley Group (LSE: BKG) have been on a roll this year, but despite the gains, the stock still looks cheap compared to the wider market. Specifically, Berkeley currently trades at a forward P/E of 7.8 compared to the market median of 14.1. And as well as the low valuation, the shares also support a highly attractive dividend yield of 5.1%. 

Unfortunately, it seems as if UK investors love to hate the housebuilders. Even though these firms have recovered entirely from the financial crisis, investors still approach the sector with caution, wary of the next downturn.

Nonetheless, despite investors’ concerns, such firms continue to report steady profit growth, stronger balance sheets and improving pipelines. For example, for the year ending 30 April 2017 Berkeley reported a cash balance of £286m, after £255m of dividends and £65m of share buybacks. Meanwhile, the group’s land bank rose to 46,351 plots (up 8.1% year-on-year) with a total indicated gross margin of £6.4bn. With this tangible asset base providing a backstop to the business, it’s difficult to argue the case against Berkeley. 

Cheap growth

Over the past five years, RM (LSE: RM) has grown rapidly with earnings per share expanding 78% between 2012 and 2016 as demand for the company’s services — IT solutions for the education sector to help teachers and students alike — has blossomed.  City analysts have pencilled in further growth for the next two years with earnings growth of 5% projected for this year, and 17% for fiscal 2018. 

Still, even though RM has been able to chalk up a rate of earnings growth that most companies struggle to achieve, shares in the company trade at a relatively undemanding forward P/E of 8.6, falling to 7.5 for 2018. Compared to the group’s double-digit earnings growth rate, these multiples appear to undervalue the business. 

As well as the attractive valuation, shares in RM support an attractive dividend yield of 4%. The payout is covered nearly three times by earnings per share, so there’s plenty of room for further payout growth here, as well as headroom if revenues start to slide. A net cash balance of £40m (year-end 2016) adds further support to the group’s dividend distributions.

The post 3 dividend stocks that are absurdly cheap right now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves 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."

Investors bought in after the education specialist released its latest set of financials. Revenues dipped 6.9% to £71.3m during the six months to May, it advised, a result that reflected “continued reduction in UK Resources revenues and lower infrastructure and project spend in RM Education.”

As a result RM saw adjusted operating profit rising just 0.2% in the first half, to £7.1m.

Online star

While hardly compelling at face value, investors have clearly taken heart from RM’s assertion that “the board’s expectations for the full year results remain unchanged.” And although school budgets remain under pressure, the steady growth in online learning and increased demand from international markets offers plenty of revenue opportunities for the future.

City analysts expect earnings to rise 4% in the year to November 2017 before revving up thereafter — indeed, an 11% improvement is anticipated for 2018. And these projections also make the Oxfordshire firm a brilliant value pick, the business sporting a P/E ratio of 10 times, which falls inside the broadly-considered value benchmark of 15 times or below.

The abacus bashers also expect dividends to continue shooting higher. Today RM elected to lift the interim dividend by 10%, to 1.65p per share, and the City expects the full-year dividend to rise to 6.3p in fiscal 2017 from 6p last year.

This projection creates a chunky 3.5% yield. And it gets even better for next year, a predicted 6.7p reward driving the yield to 3.7%.

Global giant

Those seeking healthy earnings and dividend growth should also check out advertising ace WPP (LSE: WPP), in my opinion.

Share picker appetite for the FTSE 100 company has deteriorated during 2017 as market conditions have become trickier. Indeed, the Martin Sorrell-steered vehicle has seen its stock price decline 16% since the all-time highs above £19.20 per share punched in March. The company advised that “continued tepid economic growth and recent weaker comparative net new business trends” should see like-for-like sales rise just 2% in 2017.

But this recent share price weakness makes WPP splendid value for money in my opinion. Sure, a predicted 9% earnings rise for 2017 would consign the double-digit rises of recent years to history. But this still leaves the marketing mammoth dealing on a forward P/E ratio of 12.9 times.

The trading troubles the Jersey firm is experiencing are not expected to put its long-running growth story to the sword. Another 7% earnings rise is forecast for 2018, and these perky forecasts are expected to protect its reputation as one of the hottest dividend growth stocks out there.

A 62.8p per share dividend is chalked in for this year, up from 56.6p in 2016 and yielding 3.9%. And this moves to 4.2% for 2018 thanks to forecasts of a 67.4p payment.

WPP may have to weather some difficulties in the immediate future. But I am convinced its global presence and huge wingspan across the entire advertising, marketing and public relations sphere (particularly its improving presence in digital) makes it a brilliant long-term selection.

The post 2 premier picks for growth and dividend chasers appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild 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.

However, that’s what we are seeing with RM (LSE: RM) right now, so is something wrong or is this share a bargain?

In line with expectations

The company provides educational resources, IT services and software to the education sector, and updated the market on progress on 22 March. Trading in the current year is down more than expected, according to the firm’s chairman John Poulter. Schools are being cautious with expenditure due to uncertainty over their funding and because staff costs rose this year, he reckons. One bright spot is that first-quarter trading in RM’s international business “continues its positive trend.”

Overall, the directors think full-year trading will come in as expected, which means a flat result on earnings for the year to November 2017 and 16% growth the year after that. Last year, around 20% of revenue came from outside the UK. So even though international trading is going well, I don’t think the 80% of trade coming from the UK can be dragging too hard on the firm’s results. Otherwise, City analysts’ forecasts would be bleaker. Meanwhile, the forecast growth in earnings for 2018 suggests the directors expect UK trading to bounce back.

So, a soft patch of trading in the UK this year and a positive outlook beyond that does not explain the low valuation. Even the forward dividend yield looks attractive running at just under 3.8% for 2018, with the anticipated payout covered three times by forward earnings – a high-looking level of cover suggesting the directors see opportunities to reinvest cash inflow for growth from here. Indeed, they expressed their confidence in RM’s future by hiking the final dividend for 2016 by more than 20% compared to the year before.

The elephant in the room?

There must be something wrong, and there is. It seems that the cash the firm generates from operations is all being gobbled up by the pension deficit. However, if that’s the issue holding the shares back, it could be disguising opportunity for investors.

With the full-year results for 2016, RM said the pension deficit increased “to £34.8m (2015: £21.9m) as liabilities have been impacted by lower market discount rates.” Of the just over £13m of cash from operations RM generated during the year, almost £12m went as a cash contribution to the defined benefit pension scheme. That’s a 200% increase over the £4m or so the firm threw at the pension the year before.

Nevertheless, RM is trading well, generating lots of cash, and ended 2016 with zero debt and a £40m cash pile on its balance sheet. The shares seem to be trending up and there’s no sign that the directors are scaling back their organic and acquisitive growth ambitions. RM could be well worth your further research. I think the low valuation compensates for the pension issue and a valuation re-rating could power investor returns from here as 2017 unfolds, as long as funding holds up in the education market.

The post An incredibly cheap growth and dividend stock to consider now appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

A difficult environment

Reporting on Wednesday was homewares retailer Dunelm (LSE: DNLM). It has experienced a difficult period, with the interiors industry seeing demand come under severe pressure in recent months. This has led to a 2.2% decline in like-for-like (LFL) sales in the third quarter. However, this still outperformed the wider sector with the margin increasing in the most recent quarter.

Looking ahead, more difficulties seem to be on the horizon. Inflation continues to march higher and this could cause disposable incomes to fall in real terms. The effect of this on Dunelm’s top and bottom lines could be negative, with the company due to report a 10% earnings fall in the current year. This could cause investor sentiment to worsen in the short run, although the market seems to have priced in a challenging period for the business. Evidence of this can be seen in its price-to-earnings (P/E) ratio of just 13.5.

Looking further ahead, Dunelm is expected to record a 14% rise in its earnings next year. This puts its shares on a price-to-earnings growth (PEG) ratio of around 1, which indicates that they offer excellent value for money. Their dividend yield of 4.2% is covered 1.8 times by profit, which indicates that shareholder payouts could rise significantly in future years.

While the company’s shares may be volatile, they seem to offer a potent mix of income and value potential which could lead to outperformance versus the FTSE 100.

Margin of safety

While Dunelm’s shares are cheap, international education market supplier RM (LSE: RM) appears to offer a substantial margin of safety. Its shares currently trade on a P/E of only 10.3 and since the company is forecast to record earnings growth of 16% next year, this equates to a PEG ratio of only 0.6. Therefore, even if operating conditions worsen and the company’s earnings forecasts are downgraded, its share price performance may remain relatively robust.

In terms of its income potential, RM currently yields 3.5%. This is below the FTSE 100’s yield of around 3.7%, but the company has significant dividend growth potential. Its payout ratio currently stands at around 36%, which indicates that dividend growth could beat earnings growth without putting the company’s finances under strain. And with dividends having more than doubled during the last five years on a per share basis, RM has a solid track record of rewarding shareholders when profit moves higher.

Therefore, while the FTSE 100 could continue to rise in the coming months, RM has the potential to outperform the wider index. Its mix of income and value potential may mean it delivers strong share price performance in the long run.

The post 2 dirt-cheap dividend stocks set to beat the FTSE 100 appeared first on The Twelfth Magpie.

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Peter Stephens 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.