Ask a Fool: These ultra-cheap dividend stocks yield 6% or more. But could they help you to retire early?

question marks written reminders tickets
question marks written reminders tickets

Despite rapidly deteriorating consumer confidence in the UK, as well as the intense competition in the mid-table restaurateur market, investors have been buying back into The Restaurant Group(LSE: RTN) since the leaves on the trees started falling.

The healthy upsurge which set in during mid-August has lost some steam in recent sessions, but the small-cap has avoided the sell-off that has enveloped many, many more stronger stocks. I find this baffling, particularly as news flow for the business has worsened further in recent days.

First came a fresh slew of worrying releases on the state of consumer spending, latest figures from the Office for National Statistics showing a 0.8% drop in retail sales in September. And this week news emerged that Gourmet Burger Kitchen was planning to shutter around a fifth of its restaurants in the UK. The company joins the likes of Byron, Prezzo, Harry Ramsden’s and Jamie’s Italian in shrinking the size of its estate amid challenging market conditions.

Ignore that 6%-odd yield

The thing is which I find most bizarre is that recent trading details from The Restaurant Group haven’t indicated that the already-embattled company can jump clear of this malaise.

Indeed, despite the huge effort management has made to spruce up its brands and refresh its menus, latest financials released at the end of August showed like-for-like sales drooping 3.7% in the six months to June. And as a consequence adjusted pre-tax profit dropped 21.2% to £20.1m.

At the moment City analysts are forecasting a 10% earnings slide in 2018. And as a result they suggest that the dividend, which has been held at 17.4p per share for the past three years, will finally succumb and drop to 16.8p.

I’d be happy to ignore The Restaurant Group, however, and its 5.9% forward yield due to the strong possibility of an even-bigger dividend cut. The projected dividend is covered just 1.2 times by anticipated earnings, and with net debt levels growing (to £22.8m as of June) the Frankie & Benny’s owner hardly has a strong balance sheet to keep offering such bulky payouts.

At current prices the stock can be picked up on a low forward P/E ratio of 14.2 times. Given the probability of sustained profits turmoil, however, I am steering clear.

A genuine dividend hero

Investors hunting for great dividend shares on the cheap would do much better splashing the cash on Hastings Group (LSE: HSTG) instead.

Right now the car insurance colossus carries a prospective P/E multiple of 8.4 times, and this is far too cheap given the prospect of strong and sustained profits growth beyond 2018 (for which a 2% rise is forecast by City analysts).

Hastings’ share price tanked to levels not seen for almost two-and-a-half years late last week after it advised that “market conditions have remained competitive and that claims costs are still climbing. That said, the rate at which the FTSE 100 firm is grabbing custom from its rivals suggests to me that profits should keep on rising — its share of the British motor market climbed 30 basis points to 7.5% as of September.

The 14p per share dividend predicted by the number crunchers results in a 7.4% yield. And I believe Hastings has all the tools to keep offering up market-beating payouts long into the future.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Royston Wild 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.