When it comes to income stocks, Devro(LSE: DVO) flies under most investors’ radars. However, I believe this overlooked income play is a hidden gem and could help you boost your income in retirement.
Dividend track record
Over the past five years, the producer of collagen products for the food industry has struggled to generate revenue growth. A number of factors have weighed on performance, including uncertain demand and increasing competition. For example, in a trading update published today, the company informed investors that due to the “impact from Russia’s economic and currency environment, and the slightly lower than anticipated ramp-up rate of our new Fine Ultra platform,” sales volumes of edible collagen casings are weaker than expected.
But the reason why I believe that Devro is a great stock to include in any pension portfolio is the defensive nature of the business. Global food demand is only increasing and, while the company might have had a rough time of it over the past three years, I reckon the firm should thrive over the long term as it profits from the world’s ever-expanding food demands.
Nevertheless, management is coping well with all of the headwinds facing the group. To deal with falling demand in Russia, cost-saving initiatives are under way, and this means management’s full-year targets remain in place.
Efforts to help stabilise the business over the past five years have enabled the group to maintain its dividend distribution to investors. And while it has been touch and go over the past three years, analysts are expecting the cover to return to a comfortable 1.7 times in 2018, which gives me confidence that this payout is sustainable.
Right now, the shares support a dividend yield of 5.5% and trade at a relatively undemanding forward P/E of 10.2.
Margin of safety
As Devro has floundered in recent years, homebuilder Redrow (LSE: RDW) has seen its profits surge five-fold thanks to booming demand for homes in the UK.
However, it is difficult to tell at this point if firms such as this will continue to grow at the rate they have done over the past few years in the next few. The outlook for the UK housing market is mixed, and I believe the same could be said for developers.
That being said, shares in Redrow already appeared to be priced for the uncertainty. Right now they are changing hands for just six times forward earnings, a multiple that in my view significantly undervalued the business and its prospects. On top of this attractive valuation, the shares offer a dividend yield of 5.3%, which is supported by a positive net cash balance of £63m.
In my opinion, Redrow’s discount valuation gives a wide margin of safety for investors buying the stock today. We don’t know what the future holds for the UK housing market, although over the long term we know that demand for houses will only increase.
So, even if Redrow struggles in the near term, over the long run, investors should profit. In the meantime, there’s a 5.3% dividend yield on offer.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Devro. The Motley Fool UK has recommended Redrow. 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.