2 top dividend stocks trading at bargain valuations

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Hastings Direct

Finding companies with high and sustainable yields is likely to become more challenging in future. The outlook for the UK economy is decidedly uncertain, with a General Election and Brexit just around the corner. At the same time, inflation is moving higher and this is causing demand for higher-yielding shares to increase. In turn, this may compress yields over the medium term. Despite this, here are two shares which appear to offer high and very sustainable dividend yields.

Growth potential

Reporting on Friday was general insurance provider Hastings(LSE: HSTG). It delivered upbeat performance in the first quarter of the year, with an increase in live customer policies, higher average premiums and growing retail income. In fact, live customer policies rose to 2.42m, which represents a 14% year-on-year increase. Gross written premiums were 26% higher at £214.7m, while the company's market share of UK private car insurance was 6.7% higher versus the same period of the prior year.

Looking ahead, Hastings has a sound business model through which to benefit from rising premiums after the recent Ogden rate change. It has a digitally-focused business model which should allow it to perform well through price comparison websites. Its adaptable and agile business model is expected to deliver a rise in earnings of 27% in the current year, followed by further growth of 11% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.1.

In terms of its income prospects, Hastings currently yields 3.2%. However, its dividends were covered 1.5 times by profit last year, which suggests shareholder payouts could rise over the medium term. This viewpoint is further backed-up by the company's earnings growth outlook and means that its dividends are due to rise by a third over the next two years. This puts Hastings on a forward yield of 4.2%, which indicates it is a strong long-term income stock.

Low valuation

Also offering strong income prospects is events and marketing specialist Centaur Media(LSE: CAU). It currently yields 6.7% from a dividend which is covered 1.4 times by profit. This suggests that it has scope to maintain or even raise dividends over the medium term. The chances of this taking place look set to be enhanced by earnings growth of 12% in the 2018 financial year.

Despite an upbeat growth outlook, Centaur Media trades on a price-to-earnings (P/E) ratio of just 10.4. This suggests that its shares offer a wide margin of safety, while a PEG ratio of 0.9 indicates that it offers growth at a reasonable price. Therefore, it could post improving share price performance following its 15% decline over the last year.

Certainly, the uncertain outlook for the UK and global economy means Centaur Media could experience some challenges in the near term. As a relatively cyclical business its financial performance may be more affected by the macroeconomic outlook than most of its index peers. However, with a wide margin of safety and impressive income prospects, it could be a shrewd long-term buy.

5 top income stocks

Of course, higher inflation means that dividend shares could become more popular this year. With that in mind, the analysts at The Motley Fool have written a free and without obligation guide called Five Shares You Can Retire On.

The five companies in question offer enticing dividend yields and scope to raise shareholder payouts at a faster pace than inflation. They could therefore boost your portfolio returns in 2017 and beyond.

Click here to find out all about them - it's completely free and without obligation to do so.

Peter Stephens 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.