2 hot income stocks I'd buy yielding up to 6%

The Motley Fool

Shares in pub group Mitchells & Butlers(LSE: MAB) are sliding after the company reported a decline in profits for the financial year ending 30 September 2017 and cut its dividend for the current fiscal period.

Thanks to rising costs, adjusted operating profit for the year to the end of September fell 3.1% to £314m and adjusted earnings per share declined 1.4%. On the plus side however, revenue growth of 1.8% for the period helped offset some of the declines.

According to CEO Phil Urban, profits have fallen as "cost headwinds across the industry have adversely affected margins, but we continue to work hard to mitigate as much of these as possible through our focus on efficiency and profitable sales growth."

Unfortunately, due to the company's efforts to improve efficiency, management has decided to eliminate the group's interim dividend to investors "pending assessment at year-end of capital allocation and prospects."

For the period just ended, management has recommended a payout of 5p per share, giving a yield of 1.5% at current prices. City analysts had been expected the shares to yield 3% for the fiscal year ending 30 September 2018.

Waiting for a payout

Even though today's dividend announcement is disappointing, I'm still positive on Mitchells' income outlook. According to prior year figures, the firm only paid out £31m in dividends to investors for 2016, and £12m for 2017. These distributions were easily covered by cash flow from operations. Across both years the company generated a free cash flow of around £159m.

These numbers suggest to me that management will be able to reinstate the dividend within the next few years. In the meantime, investors can buy the company today at a lowly valuation of only 7.5 times forward earnings -- a valuation that looks too cheap to pass up.

Another dividend champion that's seeing its shares crumble today after cutting the payout is Empiric Student Property(LSE: ESP). Management had been targeting a dividend payout of 6.1p for 2017, but is now reducing this to 5.6p and then 5p for 2018. Even though this reduction is disappointing, a payout of 5.6p still gives a dividend yield of 6.1% at current prices.

Long-term defensive income

Once again, this dividend cut looks to be a sensible decision that should help the REIT raise the payout in future.

Following an operational review, management has concluded that the group has grown too fast and "a number of operational inefficiencies" have "adversely impacted performance." A review of the operating structure, building sales and cost cuts are expected to put the business back on track, but it will take some time for these changes to hit the bottom line.

Over the long run, these adjustments should pay off and in the near term, management is still targeting a total annual return of 10% per annum through both income and net asset value growth.

The last reported net asset value was 105p so at today's price of 92p, for value investors focused on long-term defensive income from property, Empiric Student could be a great buy.

Dividends are the key to success

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Rupert Hargreaves owns no 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.