Even if your investment is showing a loss, you’ll continue to receive the FTSE’s 4% dividend yield, giving you a useful income.

The problem, of course, is that you can never beat the market by investing in a tracker fund. To outperform the FTSE 100, you’ll also need to invest directly in stocks and shares.

Today I’m going to look at a couple of household names you might want to consider.

Crushing the FTSE

My first choice is sofa and carpet retailer SCS Group (LSE: SCS). Despite the well-known pressures on high street retailers, SCS is doing pretty well.

The group’s share price has beaten the FTSE 100 by about 26% since my colleague Rupert Hargreaves covered the stock in October last year. And shareholders have also enjoyed a dividend yield of more than 7%, nearly double the payout from the big-cap index.

Figures published yesterday show that the Sunderland-based firm’s revenue rose by 1.3% to £337.3m during the 52 weeks to 28 July. Tight control of costs meant that the group’s operating profit rose by 10.5% to £13.2m, lifting its operating margin from 3.6% to 3.9%.

Even better than it seems

A key attraction of this business is that its costs are very flexible. By outsourcing production and making furniture to order, SCS enjoys strong cash generation and flexible costs.

The group’s net cash balance rose from £40m to £48m last year, and management said that 75% of costs are variable or discretionary. In my view, this combination of flexible costs and a cash buffer should mean a very low risk of financial distress, even in a recession.

Analysts expect SCS Group’s profits to be fairly flat over the next couple of years. But the 7.5% dividend yield is well supported. I think further gains may be possible.

Can this larger rival fight back?

DFS Furniture (LSE: DFS) is about five times larger than rival SCS. But size is no guarantee of better results.

DFS was forced to issue a profit warning in July, after sales fell significantly below management expectations during the hot weather. Today, the company revealed just how badly its profits were damaged.

The group’s full-year sales fell by 2% to £747.7m during the year to 29 July, excluding acquisitions. Including acquisitions, sales were 14% higher at £870m. But even this wasn’t enough to protect the group’s underlying pre-tax profit, which fell by 23.7% to £38.3m.

A debt bomb?

DFS Furniture’s operating margin fell from 6.1% to 3.4% this year, including acquisition and restructuring costs.

Lower profitability and the £25m acquisition of Sofology caused net debt to rise by 10% to £159m. Worryingly, this now represents 2.1 times underlying cash profits (EBITDA). That’s a big increase from last year’s figure of 1.75 times, and is well above the board’s target level of 1.5 times EBITDA.

Analysts expect profits to bounce back this year, with a 30% rise in earnings per share. This bullish outlook has left the shares trading on 11 times 2019 forecast earnings, with a prospective yield of 5.3%.

Personally, I’m not so keen. I think DFS looks risky and poor value when compared to SCS.

The post Have £1,000 to invest? This 7.5% yielder is absolutely crushing the FTSE 100 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.

Within a UK retail sector that is subject to deteriorating level of investor sentiment, though, its stock price seems to be undervalued. However, it’s not the only retailer which could be worth buying within an ISA today. Reporting on Wednesday was a stock that could deliver high capital gains.

Mixed performance

The company in question is SCS Group (LSE: SCS). It is a retailer of upholstered furniture and floorings and released interim results which showed that its performance has been mixed. In the 26 weeks to 27 January, the company was able to achieve like-for-like (LFL) order intake growth of 2.2%. This is impressive in a tough retail environment, with the company’s focus on choice, value and quality helping it to outperform some of its peers.

However, in the seven weeks from 27 January to 17 March, the company’s performance has disappointed. LFL order intake has fallen 5.3%, which is likely to be the key reason for the stock’s 5% fall in value following the release. However, the decline in sales growth has been partly caused by adverse weather conditions, so the underlying performance is likely to have been stronger.

Of course, SCS faces a difficult outlook. Consumer confidence in the UK remains at a relatively low ebb, and this could mean that its sales and profitability come under pressure over the medium term. However, with a price-to-earnings (P/E) ratio of just 8.6, it seems to offer a wide margin of safety and excellent value for money.

Comeback potential

Those same difficult trading conditions are likely to impact negatively on the supermarket sector. However, with all of the changes Tesco is making to its business model, it may able to offset these difficulties to at least some extent. For example, its focus on efficiency and improving customer service may lead to a strong performance when it comes to profitability.

In fact, the company is forecast to post a rise in its bottom line of 25% in the current year, followed by further growth of 23% next year. This shows that a recovery is very much on the cards and with the stock trading on a price-to-earnings growth (PEG) ratio of just 0.6 it seems to have significant capital growth potential.

Certainly, its share price performance may disappoint in the short run. Increasing competition from Aldi and Lidl could eat away at its market share. But with a strong management team and the acquisition of Booker, it seems to be moving towards an improved level of profitability which may filter through to a higher share price.

The post Tesco plc isn’t the only cheap growth stock I’d consider buying for my ISA appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Tesco. 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 this approach can be risky — yields of more than about 6% often indicate that problems may lie ahead. Today I’m looking at two dividend stocks with attractive yields that are well supported by earnings. Does either of these companies deserve my buy rating?

Recent falls could make this a buy

Shares in floorcovering distributor Headlam Group (LSE: HEAD) fell by 7% in early trade this morning. A solid set of 2017 results were overshadowed by news that January trading fell below expectations.

This group buys products such as carpets, tiles and laminates from suppliers in 16 countries, and sells through a network of 63 fully-owned distribution businesses in the UK and Europe.

Like-for-like sales fell by 5.9% in January, thanks to a weaker performance in the residential sector and “a reduction in orders from one of our larger customers”. This trend continued in February when is sales performance was said to be “similar” to January.

Despite this, the company has left its 2018 guidance unchanged. It’s still early in the year and management believes that its strategy of improving profitability and making selective acquisitions means forecasts for this year are still valid.

My view

Headlam’s sales rose by 2% to £707.8m last year, while underlying pre-tax profit rose 7.3% to £43.1m. The board took advantage of improved cash generation to increase the dividend by 10% to 24.8p, giving a trailing yield of more than 5%.

The firm’s focus on increasing its profit margins seems to be paying off, but it’s worth noting that like-for-like sales in the UK only rose by 0.5% last year.

Although the group also operates in Europe, the UK accounted for 97% of operating profit last year, so falling sales here are a concern.

Analysts expect the group’s adjusted earnings to rise by around 15% to 45.1p per share this year. This puts the stock on a forecast P/E of 11 with a prospective dividend yield of 5.5%. I suspect these forecasts will be cut following today’s results so I’d probably rate the shares as a hold until the outlook becomes clearer.

A cash machine with a 6.8% yield

Sofa and carpets retailer SCS Group (LSE: SCS) is a well-known sight on retail parks across the UK. It’s a cyclical business that’s dependent on consumer spending and affordable credit for growth.

When times are good — as they have been — SCS performs very well. The group’s net profit has risen from £2.6m in 2013 to £9.4m in 2017. Trading so far this year has been solid.

In January, the firm reported like-for-like order growth of 2.2% for the six months to 27 January. However, analysts expect profit growth to be broadly flat this year, suggesting that profit margins may be coming under pressure.

The stock’s valuation is undemanding, on just 9.5 times forecast earnings. Profits have been backed up by strong cash generation in recent years, and a dividend of 14.9p per share is forecast for this year, giving a prospective yield of 6.7%.

If you believe the UK economy is likely to remain healthy, SCS could be a rewarding buy.

The post Two ways to invest in dividends with only £2,000 appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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• 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.

Despite this, the sector may already include a margin of safety. This could make it attractive to income-seeking investors – especially regarding turnaround stocks.

Impressive performance

Furniture and flooring retailer SCS (LSE: SCS) reported impressive results for the first half of the year on Tuesday. They showed a rise in revenue of 14.6%, with like-for-like (LFL) order intake 2.7% higher. This contributed to a rise in gross profit of 12.4%, with operating cash flow rising from £17.3m in the first half of the prior year to £22.5m in the same period of the current year.

SCS is on target to meet its expectations for the full year. It is forecast to record a rise in earnings of 3%, which would put its shares on a price-to-earnings (P/E) ratio of 7.4 if achieved. This indicates that a relatively wide margin of safety is on offer, which may help to protect investors against a potential slowdown in consumer spending.

This low valuation has been partly caused by a fall in the SCS share price of over 10% in the last six months. However, with earnings growth of 6% due next year and the company performing well in the first half of the current year, it may deserve a higher valuation.

As well as a turnaround opportunity, SCS seems to offer strong income prospects. It has a dividend yield of 9%, with shareholder payouts covered 1.5 times by profit. Therefore, even if the retail sector endures a worsening period caused by Brexit, SCS could raise dividends to boost its already impressive yield.

A return to form

The Tesco (LSE: TSCO) dividend yield is barely above zero, but it is likely to rise rapidly over the next couple of years. In fact, dividends per share are due to increase from 0.1p in financial year 2017 to 5.8p in financial year 2019. This puts the company’s shares on a forward dividend yield of 3.1%.

And since Tesco is forecast to record a rise in earnings of 69% during that time, shareholder payouts are expected to be covered 2.2 times by profit in financial year 2019. This indicates that more dividend growth could be on the horizon post-2019.

The strategy adopted by Tesco seems to be working well. It has sought to simplify its business in almost every respect. It is now focused on the UK, is seeking to dispose of assets to return to being a specialist food retailer, and even stocks a narrower range of products in its stores to improve efficiency.

While it could suffer from a slowdown in consumer spending, the integration of Booker could deliver synergies for the business. Furthermore, its turnaround plan still has some way to go, which could mean its share price performance is relatively impressive.

The post 2 beaten-down shares with bright dividend growth prospects appeared first on The Twelfth Magpie.

More reading

• Here’s what a surging Tesco share price has done to £10,000 invested 5 years ago
• Are Tesco shares losing their momentum?
• Tesco’s share price drops 2% on Q1 trading miss. What’s gone wrong?
• As Tesco shares dip on Q1 results, is this a brilliant time to buy?
• How much might £19,999 in a Cash ISA be worth in 2036?

Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Booker. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

It said trading over the crucial Christmas and January sales period remained strong within both SCS and House of Fraser, with like-for-like (LFL) sales rising by 8.8%. That’s a superb result not only because last year was a tough comparative period, but also because the performance of the wider retail sector over the Christmas period has been rather mixed.

Due to its strong trading in recent weeks, SCS now expects to report profits that are significantly ahead of current market expectations for the full year. And with SCS having been forecast to post earnings per share (EPS) of 14.1p for the current year prior to today’s update, its shares continue to offer good value for money. That’s because they trade on a forward price-to-earnings (P/E) ratio of just 10.8 using previous guidance, which means the’re even cheaper given the fact that the company has increased its guidance for the full year.

Clearly, SCS is benefitting from an improving UK economy and this trend looks set to continue over the medium term. Although interest rates are likely to move higher within the next year, their pace of rise is set to be slow and this should encourage consumer spending to remain relatively robust. Furthermore, with global deflation still being a major risk, the Bank of England is unlikely to move rates higher at a rapid rate. Continued low inflation not only backs up this view but also indicates that real terms disposable incomes in the UK are likely to rise over the medium term.

As such, and while SCS remains a highly cyclical and relatively risky buy, its shares could move significantly higher and this makes it a relatively appealing buy at the present time.

Competition-beater

Also focused on the UK economy is Premier Inn and Costa Coffee owner Whitbread (LSE: WTB). It has been a major success story of recent years, with its product/service offering being exceptionally strong. In other words, Whitbread has delivered exactly what customers have wanted, with its budget hotel division beating the competition on value for money, while its coffee chain has consistently beaten rivals on quality and overall customer experience.

Therefore, it’s of little surprise that Whitbread has been able to increase its earnings by 18.5% per annum during the last five years. Looking ahead, Whitbread is forecast to post further growth of 13% in the current year, followed by growth of 12% next year. And with its shares trading on a price-to-earnings growth (PEG) ratio of 1.5, they appear to offer excellent value for money given that the company has such a reliable track record of earnings growth.

One potential risk of investing in Whitbread is the introduction of the living wage. This will affect the company in a major way since around 42,000 of its employees are paid by the hour and its strategy to cope with it appears to be to increase prices. While this could maintain margins, it could also cause sales to come under pressure. As such, and with Whitbread’s management team having changed recently, it seems to be a stock to watch, rather than buy, at the present time.

The post Are SCS Group PLC And Whitbread plc Set To Soar? 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?

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