The £250m market cap financial services business has an excellent dividend track record. The payout has increased by an average of 6% per annum since 2013, rising from 62p to 83p per share today.

And City analysts don’t expect this trend to come to an end any time soon. They believe the payout will grow by an inflation-busting 4% to 86.2p this year and a further 4.3% in 2020 to just under 90p per share. If the company meets these targets, then the stock will yield an estimated 6.7% by 2020, with the payout covered an estimated 2.3 times by earnings per share. 

Cheap stock

In my opinion, this dividend track record deserves a premium valuation. However, the market seems to be overlooking the opportunity here. At the time of writing, shares in Secure trade at a forward P/E of just 7.6, despite the fact analysts believe the group’s earnings per share will jump 17% this year and a further 19% in 2020. 

However, according to the financial group’s first-half results to the end of June, adjusted earnings per share increased ‘only’ 10.2% year-on-year. Adjusted operating profit (profit before the impact of one-off gains or losses) before tax jumped 13.9%. Statutory profit before tax, which includes one-time gains and losses achieved by the company during the half, increased 19.9% to £18.1m

These results indicate that the company’s growth for the full year might come in below City expectations, but it doesn’t look as if analysts are that far off the mark.

As well as the firm’s double-digit earnings growth, it also has a healthy balance sheet with a common equity tier 1 ratio of 12.8% and a capital ratio of 15.2%.

So, if you are looking to invest in a well-capitalised, undervalued and fast-growing business with a dividend yield of 6%, I highly recommend taking a closer look at Secure. 

Mission complete?

Another financial group with a market-leading dividend yield that I would consider adding to my stocks and shares ISA today is Provident Financial (LSE: PFG).

Provident has had a series of problems over the past few years, both self-inflicted and regulatory. However, it looks as if management has finally managed to put the bulk of these issues to bed.

Earlier this year, Provident reported full-year profits slightly ahead of analysts’ expectations and restored its dividend. The sub-prime lender also said it had resolved most of its regulatory problems. 

Analysts are not forecasting a complete earnings recovery for the firm just yet, but they are forecasting explosive dividend growth for the next two years.

From a token payout of 10p in 2018 (down from nearly 100p per share in 2016) the City has pencilled in a dividend payout of 26p for 2019, rising to 35p for 2020. Only time will tell if the company has what it takes to hit these forecasts, but I think the risk is worth taking.

Based on current earnings projections, the stock is trading at a P/E of just 7.8, falling to 6.5 for 2020. What’s more, analysts’ current dividend outlook suggests investors are in line for a yield of 6.9% for 2019. In my view, this potential reward more than outweighs the risk of investing. 

The post I’d buy these two 6%+ yielders for my Stocks and Shares ISA today 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.

Think small

It isn’t hard to see why most of us focus on big high street banks such as Barclays (LSE: BARC). This is a FTSE 100 giant with a market cap of £26bn that generated total income of more than £21bn last year and posted a profit before tax of £3.49bn. Yet you shouldn’t let that blind you to opportunities elsewhere.

Many investors won’t have given Secure Trust Bank (LSE: STB) a second glance, yet this is a really tempting dividend stock with a forecast yield of 6.7%, underpinned by substantial cover of 2.1. Its share price is up almost 8% today after it published its audited full-year results, which showed a healthy 38.8% increase in group profit before tax to £34.7m in the year to 31 December. 

Going up

Today’s numbers all look good, with operating income up 17.1% to £151.6m, basic earnings per share up 42.2% to 153.2p, and adjusted return on average equity of 13.1%, up from 8.9% in 2017. Today it said its “higher quality book has significantly reduced cost of risk” and it has a healthy common equity tier 1 ratio of 13.8%. This has fallen from last year’s 16.5% but should still support strong growth in the bank’s loan portfolios.

Secure Trust Bank can trace its history back to 1952, although it only listed on the London Stock Exchange in 2016 where it has a current market cap of £254m. Its primary focus is savings and mortgages in the personal market, and business banking.

City analysts anticipate healthy EPS growth of 15% this year and 16% in 2020, yet it trades at an embarrassingly cheap valuation of just 7.4 times earnings. That is partly due to a 21% share price slide over the past year, but the recovery may now have started. By 2020 yield is forecast to hit 7%. Well worth checking out.

Think big too

Barclays has also had a rough year, its share price falling 25%. It has been hit by Brexit uncertainty, stock market volatility and global recession fears, which could hit the banking sector by triggering a sharp increase in customer bad debts.

This might be a bigger concern if Barclays stock was trading at a toppy valuation, but it is yours for just 7.1 times earnings. Its price-to-book value stands at just 0.4, well below the 1 that is seen as fair value. Even better, EPS are forecast to rise 136% this year to 22.15p, giving cover of 2.9, with the dividend expected to be just 7.51p a share.

Maybe buy both

The regulatory authorities have also worked hard to boost banking sector security and Barclays now has a Tier 1 ratio of 17%, for added peace of mind.

Currently, Barclays is on a prospective yield of 4.8%, which is forecast to hit 5.5% in 2020. That’s not quite as generous as Secure Trust Bank, but still tempting as further dividend growth is expected. These two banks are both available at dirt-cheap valuations and sky-high yields. Sometimes big and small can be beautiful at the same time.

The post Why I’d buy the undervalued Barclays share price and this 6% dividend stock appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Secure income 

My first pick is financial services group Secure Trust Bank (LSE: STB). At the time of writing, shares in this enterprise are trading at a forward P/E of just 8 and support a dividend yield of 6.6%. 

Usually, when a bank’s valuation falls to this level, it’s a sign the market believes something is going wrong under the bonnet. However in this case, I can’t see anything to be concerned about. Secure Trust has a Tier 1 equity capital ratio of 13.6%… and its earnings are exploding. 

During the first half of 2018, the bank’s earnings per share (EPS) jumped 36.6% and analysts are forecasting growth of 45% for the full year, which should leave the dividend covered 1.9 times by EPS.

It looks to me as if the market has oversold this bank, and the stock could be an excellent buy for value-seeking investors after sliding nearly 40% over the past 12 months. 

Slow and steady 

My next embarrassingly cheap income play is Investec (LSE: INVP). Investec tends to fly under the radar of most investors because the company is, well, boring. Indeed, with EPS growth averaging 9% over the past nine years, Investec isn’t going to win any awards any time soon. 

Still, what Investec lacks in growth it more than makes up for in reliability. As mentioned above, the company has churned out consistent earnings growth of 9% per annum for the past six years, but despite this, the share price has hardly budged. Even though EPS have expanded from 30p in 2013 to 50p for 2018, the shares are around 10% lower today than they were at the same time in 2013 (~500p). The group’s dividend has also increased 44% over this period, and today the stock yields 5.4%. 

At the time of writing, shares in Investec trade at a forward P/E of just 8.5, which is, quite frankly, an embarrassingly low multiple for a business that has seen EPS expand 67% over since 2013. It could be worth buying the shares today before the rest of the market catches on to Investec’s untapped potential. 

Steel stock 

My last cheap income stock is Evraz (LSE: EVR). As a cyclical steel business, it comes with more risk than both Secure Trust and Investec. However, right now shares in this business are so cheap, there’s a wide margin of safety for investors if anything goes wrong.

Evraz is trading at a forward P/E of 7.3 and a discount of around 20% to the rest of the metals and mining sector on an EV/EBITDA basis. These figures are already based on the City’s expectation that EPS will slide 34% in 2019 to $1.11 from 2018’s blow-out number of $1.68.

Considering that shares in Evraz are trading at a discount of 20% to the rest of its sector, earnings could fall a further 20% before it started to look fairly valued.

On top of this margin of safety, shares in the steel producer support a dividend yield of 9.1% (based on the City’s target for 2019). The payout is covered 1.5 times by EPS, so it looks reasonably secure for the time being. 

The post 3 embarrassingly cheap dividend stocks I’d buy 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, after watching the share price fall more than 40% over the past three months, I reckon now could be the time to get involved. 

Cash cow

The first thing that you notice when you look at Jackpot’s balance sheet is the company’s debt. At the end of 2017, the firm had an adjusted net debt balance of £387m, and an adjusted leverage ratio of 3.6 times. But this balance is falling rapidly. The group’s results for the nine months ended 30 September, which were published today, show the adjusted net leverage ratio falling to around three times. Meanwhile, adjusted net income increased 36% year-on-year, partly thanks to a 36% decrease in interest expenses. 

Jackpot’s hidden weapon is its free cash flow. For the year to the end of September, the group generated operating cash flows of £33m, most of which was used to pay down debt. 

In my view, this robust cash generation indicates that Jackpot is set to become one of the market’s top income stocks when debt is reduced to an acceptable level. Management is targeting a leverage ratio of below 2.5x earnings before interest, tax, depreciation, and amortisation, at which point “the Board can consider options to return cash to shareholders.“

As group free cash flow was £31m for the year to the end of September, I think cash returns could exceed £30m per annum, which gives a yield of more than 26% on the current market value. 

That said, Jackpot’s outlook isn’t wholly speed-bump free. In today’s release, management acknowledges that headwinds, including the expiration of a non-compete arrangement and additional gambling regulations, will hurt revenue growth over the next 12 months. So, I’m not willing to bet the house just yet. Nevertheless, with a potential dividend yield of more than 20% on the horizon, it looks to me as if there’s a wide margin of safety in the figures for investors buying today. 

Slow and steady 

With so much debt on the balance sheet, some investors might not be comfortable owning Jackpot. If you fall into this bracket, I think you should check out Secure Trust Bank (LSE: STB). 

Secure Trust has grown rapidly over the past five years, expanding revenues from £57m to £131m for 2017. Analysts expect the business to report further growth in 2018, with revenues set to rise to £154m, and then £181m in 2019. Off the back of this revenue growth, analysts think the company will earn 187p per share in 2019.

Historically, Secure Trust has distributed the majority of its earnings to investors via dividends. Analysts expect this to change over the next few years, however, as earnings growth accelerates. Payout cover is predicted to rise from 1.4 times in 2017, to 2.1 by 2019. 

I think these numbers could be conservative, considering Secure Trust’s history of distributing close to 100% of earnings. And analysts’ yield projection of 6.1% for 2019 understates Secure Trust’s true potential as an income play. Even if I’m wrong, a yield of more than 6% is nothing to be sniffed at. What’s more, today the stock is trading at a forward P/E of just 9.5. What’s not to like? 

The post This small-cap could yield more than 20%! Is time running out to buy? 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.

Building a second income stream from high-quality dividend stocks is a fantastic way to create wealth over the long term. And the best part is, this strategy requires little effort on your part. Here are two companies that I believe are perfect candidates to help you accomplish this goal. 

Slow and steady 

Pub group Fuller Smith & Turner (LSE: FSTA) might not be the first income stock on investors’ radars, but that does not mean you should overlook this income champion. 

Over the past six years, the group’s dividend per share has grown at an average annual rate of 8.2%. Today the shares yield 2.1%, compared to the market average of 3.7% and trade at a forward P/E of 15. 

You might be wondering why I believe Fuller’s is a great income stock with a yield below the market average. The reason is that payout is covered three times by earnings per share, and the company, which is one of the largest pub and hotel groups in the UK, has a strong balance sheet and bright growth outlook. 

Today’s full-year numbers from the group showcase its strengths. For the 52 weeks ended 31 March, revenue jumped 5%, “above the industry average” for managed pubs and hotels. Adjusted earnings per share increased 4%. 

Off the back of these numbers, management has increased the full-year dividend by 4% to 19.6p per share. 

These are tough times for the pub industry with costs rising thanks to Brexit, rising business rates, a higher minimum wage and apprenticeship levy, factors that are causing strain across the industry. However, it seems as if Fuller’s has been able to offset these issues. “During the year, we have had to absorb a number of cost pressures” today’s release noted. “Despite this, we have continued to grow profits and the impact has been mitigated to a margin dilution of 10 basis points” it continued. 

Fuller’s efforts to mitigate these pressures are a testament to the group’s structure, and efforts by management to cut waste. Reinvestment in operations has been essential to staying ahead of the rest of the sector. The company spent £28.2m on refurbishment, new pub openings, automated equipment for its Chiswick Brewery and IT investment throughout the year. Capital spending was easily covered by £51m of cash generated from operations. Dividends only cost the firm £11m, so there’s plenty of headroom for further dividend hikes. 

Considering all of the above, I believe Fuller’s can help you build a second income from shares despite its relatively low yield. The dividend is well funded, and the company is spending millions investing in itself to drive growth. 

Secure income 

Secure Trust Bank (LSE: STB) is another stock I believe can help you build a second income stream. At the time of writing, this stock supports a dividend yield of 4.4%, above the market and the banking sector average of 3.5%. 

In my view, over the past five years, Secure Trust has quickly established itself as a high-quality income stock. For 2018 the firm is expected to distribute 83.2p per share, up 46% from 2012’s payout of 57p giving an average annual growth rate of 6.7%.

And the sustainability of this distribution is set to increase substantially over the next two years if City expectations are to be believed. Analysts have pencilled in earnings per share growth of 38% for 2018 followed by growth of 33% for 2019. The dividend is expected to grow at a more moderate pace — 5.3% for 2018 and 7% for 2019 — the result being that dividend cover will rise from just 1.1 in 2016 to 2.2 by 2019. 

With this being the case, Secure Trust’s investors are not only set to receive a market-beating dividend yield, but they should also benefit from capital growth as well. At present the stock is trading at a forward P/E of 13.2, falling to just 9.9 by 2019 based on current growth expectations.

The post You could build a second income stream with these champion dividend growth stocks 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.

Secure option

Rather than investing in this wounded beast, you might prefer to invest in something younger, sleeker and with a more rewarding dividend. Challenger bank Secure Trust Bank (LSE: STB) has just issued its audited final results for the year to 31 December 2017, and investors like what they see. Its stock is up 3.77% at time of writing after it announced increased profits in a year of strategic repositioning.

The West Midlands-based bank was founded in 1954 but only listed on the stock market in October 2016. It takes savings and lends money to individuals and to businesses but remains a minnow compared to blue-chip behemoth Barclays, with a market cap of £377m against £35bn.

Making money

Secure Trust Bank has none of Barclays’ manifold legacy problems but it is nonetheless in recovery mode, with its share price halving over the last couple of years. That is despite reporting “excellent progress” in 2016 and record profits last year.

Today, it announced group profit before tax on continuing operations of £25m, a 28.9% increase on 2016, as it develops its SME, retail finance and motor lending activities, and launches a mortgages division and new online deposit platform. “The group finished 2017 with strong capital and funding positions and its largest ever pipeline of new business in its chosen markets,” management said.

Time to trust

Secure Trust Bank currently trades at a bargain forward valuation of 9.5 times earnings and offers investors a generous forecast yield of 5.2%, covered twice. Better still, earnings per share (EPS) are forecast to grow 49% this year, and another 32% in 2019. These numbers look highly promising to me.

My fellow Fool Kevin Godbold reckons that Barclays’ performance is too patchy to buy into now, but I believe the bank is due a recovery spurt sooner or later, and it could pay to get in at today’s lowly forecast valuation of just 10.4 times earnings. The outlook should brighten if it can keep its nose clean and keep further fines and penalties at bay, with EPS expected to rise 15% in 2019.

Rising yield

Markets are baffled by stealth investor Edward Bramson’s intentions towards Barclays after he revealed a 5.2% stake in the company on Monday, although his partner Aviva said he will not be pushing for seismic changes such as selling off the investment bank or Barclaycard. Pimco is also building up its stake in Barclays. Maybe you should too.

The ride may be bumpy but that is all the more argument for investing when Barclays is down, rather than up. It still trades 22% lower than five years ago but this makes for a tempting entry point. The stock yields just 1.5% today, but that is forecast to hit 3.5% over the next year, then 3.8% the year after. One day, it might even catch up with Secure Trust Bank.

The post This challenger bank’s 5% dividend yield easily beats Barclays plc appeared first on The Twelfth Magpie.

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Harvey Jones no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Throughout the banking crisis he’d say things to me like “I don’t understand what it’s all about, but the slimy bankers will come out smelling like roses as they always do,” and he went on taking his annual dividend as scrip.

That buy and forget approach has served him well, with HSBC shares up around 1,500% in the time he’s held them. And reinvesting those dividends, which in recent years have been averaging around 5%, has made a huge difference.

Forecasts suggest yields of around 5% for the next couple of years, and that’s after the bank has almost finished returning a cool $2bn to investors in the form of share buybacks.

Attractive valuation

At a share price of 790p, we’re looking at P/E multiples of around 14, which is close to the long-term FTSE 100 average.

For me HSBC’s valuation is about as good as they come. It’s not stupidly cheap, or overheated in the hope of growth, with the risks those entail. It’s just a very good company at a good price — the kind of thing that Warren Buffett exhorts us to seek.

Liquidity looks fine now too, after HSBC’s third-quarter update revealed a strong CET1 ratio of 14.6% at 30 September. And under the worst of the Bank of England’s stress tests, reported in November, that would have dropped to a still comfortable 8.9%.

In short, HSBC is a cash cow.

An even better one?

But over the medium term, I think the so-called challenger banks could do even better, partly because sentiment seems weaker towards smaller financial companies right now.

One of those is Secure Trust Bank (LSE: STB), whose shares do seem to be out of favour at the moment — they’re down 47% since their peak in November 2015, to 1,798p.

Thursday’s full-year trading update was essentially “in line with market expectations,” which suggests a flat year for earnings for 2017. But what excites me about the outlook for Secure Trust is forecasts for EPS growth of 27% this year followed by 33% in 2019. 

And the latest update gives me confidence that the bank’s risk is falling. Secure Trust has “continued to reposition its lending portfolios away from higher-risk consumer lending during the final quarter of 2017,” and has sold what was left of its unsecured personal loan book.

Earnings growth

If forecasts come good, the company’s P/E would drop to under eight by 2019, with PEG ratios for this year and next of 0.4 and 0.2 respectively. A PEG of less than 0.7 is often seen as very attractive by growth investors, and Secure Trust’s relatively small portion of the very large banking market is what makes such potential growth possible.

Dividends are strong and progressive, with a yield of 4.4% expected for the year just ended, and predicted to grow to 5.2% by 2019. And that dividend would be significantly better covered by earnings than HSBC’s, with cover of 2.4 times compared to HSBC’s 1.4.

The dividend is progressive too, and I see significant scope for uplifts in the coming years — buying now could lock in some strongly-rising effective future yields.

And as Secure Trust is 100% UK-focused, I really don’t see much in the way of the Brexit risk that’s holding the banking sector back.

The post A challenger bank that could beat HSBC Holdings plc in 2018 appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.

I believe that the best income stocks have three key traits: 1) a market-beating dividend yield that’s well covered by earnings per share; 2) a relatively clean balance sheet and; 3) a record of increasing shareholder payouts. 

Record of dividend growth

Dixons Carphone (LSE: DC) appears to meet all of these criteria. Right now, the shares support a dividend yield of 5.4%, and the payout is covered more than twice by earnings per share. As well as this attractive income stream, the stock also trades at a lowly forward earnings multiple of only 7.6. 

With regards to Dixons’ balance sheet, at the end of its last fiscal year, gross gearing (total debt to equity) was 16%, and net gearing (net debt to equity) was only 6.6%. For the fiscal year ending 29 April 2017, the firm generated free cash flow (cash from operations minus capital spending) before dividends of £120m, which easily covered the total dividend distribution of £115m. 

Lastly, the company has an impressive record of dividend growth. Since 2013 the payout has grown at a rate of around 17.6% per year, from 5p per share in 2013 to 11.3p for fiscal 2017. So overall, it looks to me as if Dixons meets all of my income stock requirements. 

Cash-rich balance sheet

Headlam (LSE: HEAD) is engaged in the marketing, supply and distribution of a range of floor covering products, which is hardly the most exciting business, but it pays well. Management has historically returned most of this income to investors, and it does not look as if this trend will change anytime soon. 

Right now the shares support a dividend yield of 5.1%. The payout is covered 1.7 times by earnings per share. Further, Headlam’s balance sheet is exceptionally robust with net cash of £53m at the end of 2016. According to the firm’s figures, the total dividend only costs £23m a year, so even if revenues dropped to zero tomorrow, there would still be scope to maintain the payout for the next two years. 

Over the past seven years, the group has hiked its dividend by just under 10% per annum from 14.2p in 2011 to 23.4p for 2017. Once again, Headlam ticks all of the boxes in my simple top dividend stocks screen. 

Banking income

Shares in Secure Trust Bank (LSE: STB) have fallen by around 20% year-to-date thanks to concerns about the sustainability of its growth as the UK leaves the EU. While the market is worried about the firm’s outlook, analysts do not appear to hold the same view with earnings growth of around 30% per annum pencilled in for 2017 and 2018. 

As well as this earnings growth, the shares support a dividend yield of 4.8%. The payout is covered around 1.5 times by earnings per share. On the balance sheet front, at the end of June, Secure Trust reported a common equity tier 1 ratio of 15.3%, a ratio that’s stronger than that of larger peers such as Lloyds and RBS. 

So Secure Trust offers an attractive, well-covered dividend yield and has a strong balance sheet but what about dividend growth? Well, since 2012 the bank’s dividend has grown from 57p per share to 79p (estimated for full-year 2017). And considering analysts’ expectations for growth in the years ahead, I believe that this expansion is set to continue. 

The post Why I believe these 3 dividend stocks can fund your nest egg appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Lloyds Banking 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.

Embattled outsourcer Serco (LSE: SRP) had some good news for investors today. The company, which has been undergoing a restructuring for around three years, announced this morning that it had signed heads of terms to acquire a portfolio of “selected UK health facilities management contracts” from Carillion, for a total consideration of £50m. 

Also, the company told investors today that it has spent £15m to acquire US defence engineering firm BTP Systems. The deal is set to complete “around the end of next year” while the healthcare contract is expected to be fully integrated by the end of 2018 too. The healthcare deal will produce estimated annual revenue of approximately £90m for more than a decade. 

A turning point 

The fact that Serco has started to do deals again marks a turning point for the struggling business. Indeed, after three years of falling profits and revenues, this year City analysts are expecting the company to report a robust recovery in pre-tax profit. 

A figure of £55m has been pencilled in, up 83% year-on-year on revenues of £3.07bn, up 2%. 

I believe that this return to growth will result in a higher dividend for investors. Serco slashed its payout in 2013, from 10p per share to 2.5p before eliminating it entirely. Analysts are expecting a token distribution of 0.13p this year rising to 0.4p for 2018. 

After this growth of 200%, there is scope for further payout increases as earnings continue to expand. Based on current projections, the payout will be covered 10 times by earnings per share for 2018. Historically, Serco has paid out around one-third of earnings to investors via dividends. As revenues stabilise, I expect management to re-adopt this strategy. 

According to my figures, paying out one-third of earnings for 2018 would give a total dividend of 1.2p per share, up 900% from current levels. 

Dividend champion 

Growth at Secure Trust Bank (LSE: STB) has been nothing short of exceptional over the past five years. Revenue has expanded from £47m to an estimated £138m for this year and if the company hits City analysts’ estimates for growth, by 2018 earnings per share will have doubled in the space of seven years. 

However, despite this growth, the company remains unloved by the market. The shares support a dividend yield of 4.5% and only trade at a forward P/E of 12.9, falling to 9.9 for 2018. 

If the company can repeat its performance of the past five years, I believe that there’s scope for both the shares and dividend to double. Doubling earnings per share to 300p or more by 2025, and assuming the earnings multiple remained the same, would give a share price of 3,600p, a return of 10.4% per annum. This excludes and dividend payments. 

Right now the company distributes 60% of earnings to investors via dividends. Some 60% of 300p would give a dividend payout of 180p per share, up 125% from current levels, providing a yield of 10% at current prices. 

The post 2 attractive income stocks whose dividends could jump 100% 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.

A changing business

Under its current management team, AstraZeneca has pursued a strategy of acquisitions. This has strengthened its drug pipeline and created a business which has growth potential in the long run. The acquisitions it has made have been a sound use of cash, with it focusing on areas such as diabetes that could prove to be a major growth area in future years.

Looking ahead, more acquisitions could be on the cards. The company has a sound balance sheet and excellent cash flow. Together, they mean that it could increase significantly in size to accommodate other businesses. This could not only boost its financial performance, but also improve investor sentiment in order to generate a higher rating for its shares.

Investment opportunity

After a number of years of falling profitability, AstraZeneca is expected to record positive earnings growth in 2018. While an anticipated rise in earnings of 2% next year is hardly exceptional, it would represent tangible progress for the business. This in itself could mean the stock is worthy of a higher price-to-earnings (P/E) ratio than its current 15.5. And with a number of other pharmaceutical companies having significantly higher ratings, it would not be difficult to justify a higher valuation.

Higher profitability is also likely to lead to greater dividend payments over the medium term. Currently, the stock yields 4.9% from a dividend which is covered 1.3 times by profit. A growing dividend could act as a further positive catalyst and mean that the company’s total returns improve in future. As such, now could be the perfect time to buy it.

Repositioning

Also offering upside potential is banking and financial services company Secure Trust Bank (LSE: STB). It reported encouraging results on Tuesday which show that the changes it is making to its business are starting to bear fruit. For example, its profit before tax increased by 11%, while its overall loan book increased by 34% and customer deposits increased by 27%.

The company is expected to report a rise in its bottom line of 9% in the current year, followed by further growth of 33% next year. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 0.3, which suggests it offers a wide margin of safety. And with a dividend yield of 4.4% from a payout which is covered 1.9 times by profit, its income prospects continue to be robust. After a 17% share price fall in the last year, it could be worth buying.

The post Why AstraZeneca plc could have a major impact on your investment performance appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca. 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.