We believe that equity-income investors shouldn’t purely focus on the traditional dividend stalwarts at the top of the FTSE 100.
Across the entire UK equity market there are over 550 dividend-paying companies, many of which have more attractive earnings growth characteristics than traditional income sectors such as banks, miners and tobacco. This profit growth can in turn underpin attractive levels of payout growth.
We therefore judge stocks by three key attributes: a company’s dividend yield, of course, but arguably more importantly, the company’s earnings growth, and its potential dividend growth.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Ideally, we are looking for stocks that we think can deliver on all three metrics, ahead of the wider UK equity market, through the cycle. This results in a multi-cap approach, with a bias towards faster-growing small and mid-cap firms, where we find many of the more interesting opportunities. Below we highlight three stocks we have held in the portfolio for some time, yet, we suggest, offer a potentially extremely attractive entry point for investors on a mid-term horizon.
Profitable pawnbroking
H&T Group (Aim: HAT) is Britain’s largest pawnbroker. Established in 1897, it has over 250
stores and offers customers a diversified product portfolio including pawnbroking, unsecured lending and foreign exchange. It is also the UK’s sixth-largest retailer of high-quality, pre-owned and new jewellery and watches.
The business delivered a fantastic performance last year, with profit growth of more than 140%. Looking ahead, analysts expect profits to expand at a compound annual growth rate (CAGR) of 38% to the end of 2024, with a potential dividend yield in excess of 5% this year. Despite these impressive metrics, the stock is still on a prospective price/earnings (p/e) ratio multiple of less than eight, well below its long-term average.
A diverse alternative-asset manager
Intermediate Capital (LSE: ICP) is a global alternative-asset manager. It currently manages approximately $75bn across a variety of strategies. Even though the fundraising environment has become more challenging, the business continues to make progress, recently reconfirming its ambitious fund-raising targets for the next two years.
Profit growth, underpinned by an increasingly diverse product range, has enabled the business to raise its ordinary dividend for 12 consecutive years, reporting 36% growth in the year to 31 March 2022. The group is expected to generate a dividend yield of 6.5% for the year to 31 March 2023, and on a prospective p/e of less than ten, this stock is on a discount to its long-term average valuation.
Cash in on corner shops
A leading independent wholesale business supplying the convenience-retail sector, Kitwave (Aim: KITW) operates from 29 depots across the UK and listed on Aim in 2021. The business has delivered attractive levels of growth both organically and through complementary acquisitions.
For the current financial year the stock is expected to produce revenue growth of more than 13%, adjusted profit growth of over 24%, and an attractive dividend yield of 4.3%. Despite this excellent record since listing, and these appealing metrics, the stock is again attractively valued, trading on a prospective p/e multiple of only ten.
-
What will the unravelling of US-China trade mean for the economy?What will a US-China decoupling mean for the global economy?
-
Scottish Mortgage: why we’re turning to private companies and China for exceptional returnsWhen it comes to delivering growth, Scottish Mortgage will stop at no end in its hunt for exceptional long-term returns - this includes China, unicorn companies and sectors such as space exploration
-
Where to invest in the metals that will engineer the energy transitionA professional investor tells us where he’d put his money. This week: John Ciampaglia, manager of the Sprott Energy Transition Materials UCITS ETF.
-
Tap into the key long-term growth trends with these resilient performersA professional investor tells us where he’d put his money. This week: Zehrid Osmani, portfolio manager, Martin Currie Global Portfolio Trust, picks three favourites.
-
Look beyond familiar stockmarkets for reliable returns in rough timesTips A professional investor tells us where he’d put his money. This week: Giles Parkinson, managing director of global funds at Close Brothers Asset Management.
-
Three British stocks offering all-weather incomeTips A professional investor tells us where he’d put his money. This week: Brendan Gulston, co-manager of the LF Gresham House UK Multi Cap Income Fund.
-
Power your portfolio with the profits of China’s electric-vehicle makersOpinion A professional investor tells us where he’d put his money. This week: Ewan Markson-Brown of the CRUX Asia ex-Japan Fund highlights three favourites.
-
Incredible India: the world’s biggest democracy is set for decades of growthOpinion A professional investor tells us where he would put his money. This week: Gaurav Narain, manager of the India Capital Growth Fund, selects three favourites.
-
Profit from the rise of shareholder activism in Japan’s small companiesTips A professional investor tells us where he’d put his money. Daniel Lee, head ofJapan Research, AVI Japan Opportunity Trust, highlights three promising stocks.
-
Invest in space: the final frontier for investorsCover Story Matthew Partridge takes a look at how to invest in space, and explores the top stocks to buy to build exposure to this rapidly expanding sector.
