Today, I'm looking at two under-the-radar stocks with solid dividend potential.
Strong dividend cover
Shares in Dairy Crest Group(LSE: DCG) don't come cheap, as the producer of Cathedral City, Clover and Frylight trades at a price-to-earnings ratio of 16.4. The dairy foods company is highly rated by investors due to the stock's solid history of annual dividend increases and its attractive near-term earnings growth prospects.
Investors can also take confidence from Dairy Crest's improving profitability. Adjusted earnings per share advanced 19% during the six months to 30 December, as the company benefitted from Cathedral City's new brand packaging and steady progress made in the infant formula market. The group has made big investments over recent years to manufacture demineralised whey, a key ingredient for infant formula, and its good to see the company beginning to get production and sales underway, just as prices are now starting to rise.
Dairy Crest is due to announce its full-year results in May, with City analysts expecting adjusted EPS to gain 4% this year. As such, dividend cover for the stock is expected to rise above 1.6 times this year, making Dairy Crest a reliable dividend stock for income chasers. Moreover, with capital expenditures expected to fall back after big investments over the past few years, the company is forecast to generate considerable free cash flow, giving the company plenty of room to grow dividends further.
With a current dividend yield of 3.9%, Dairy Crest also yields considerably more than the sector average of 1.9%.
Steady cash flows
Closed-book life insurer Chesnara(LSE: CSN) is a great example of why strong cash generation is vital for a stable progressive dividend policy. That's because although life insurers suffer from volatile earnings due to the variable nature of investment returns and the timing of customer claims, steady cash flows at Chesnara have enabled the company to grow its dividend in each of the last 12 years.
Investors should also note that despite the low interest rate environment, its cash generation has remained robust. The company has continued to generate more cash than is needed to fund its annual dividends organically and is expected to continue to create value for shareholders by making further acquisitions. Its acquisition of Legal and General Nederland, announced in November 2016, is expected to add around £56m to its Economic Value (EcV) this year.
Currently, Chesnara pays a dividend of 19.49p a share, which gives shareholders a tempting dividend yield of 5%. The insurer also trades at a modest 3% discount to its EcV -- that's the present value of future profits from existing policies plus the net assets of its non-insurance business, which makes it a key measure of the insurer's intrinsic value. It's also a conservative measure of the insurer's underlying value, as it assumes Chesnara makes no further accretive acquisitions in the future.
Jack Tang has no position in any 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.