3 high-yield turnaround stocks set to beat the FTSE 100

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Greene King

With inflation moving higher, dividend stocks could become increasingly popular. When coupled with low valuations, such companies could outperform the FTSE 100 over the long run. Here are three shares which seem to offer both of those qualities, plus turnaround potential.

A difficult period

Reporting on Friday was pub group Greene King(LSE: GNK). Its shares declined by over 10% as like-for-like (LFL) sales fell by 1.2% in the 18 weeks to 3 September. Bad weather and competition from value food offerings were to blame, with the company now seeking to strengthen its customer offer in response.

As well as this, Greene King expects to deliver £45m in cost savings this year, while also generating synergies from the Spirit acquisition. This could help to turn its performance around, while its price-to-earnings (P/E) ratio of 8.2 suggests there is a wide margin of safety on offer. This could equate to a significant upward rerating in future years.

With a dividend yield of 5.9% from a payout which is covered more than twice by profit, the stock appears to be a strong income play. While having an uncertain outlook, it could outperform the FTSE 100.

Defensive opportunity

Also offering index-beating potential is United Utilities(LSE: UU). The water services stock offers a defensive profile which may become increasingly popular among cautious investors. With UK GDP growth stalling, US political risk high, and the chances of conflict involving North Korea apparently increasing, defensive shares may become more in-demand. This could push their valuations higher after a lacklustre period which has seen the United Utilities share price decline by 9% in the last three months.

With a dividend yield of 4.4% from a payout which is covered 1.1 times by profit, the company appears to be a solid income play. Its bottom line is due to rise by 14% next year, which suggests that dividend cover could increase and dividend growth may be able to at least equal inflation over the long run. Although it has a P/E ratio of 20, the company's valuation could move higher.

Turnaround potential

While gaming company William Hill's (LSE: WMH) past performance has been somewhat disappointing, its current strategy seems to be working well. After two years of declining profitability, it is expected to post a rise in its bottom line of 5% in the current year, followed by growth of 8% in the year after.

Despite its clear turnaround potential, the company trades on a price-to-earnings growth (PEG) ratio of just 1.3. This indicates that its share price could deliver substantially better performance than its 25% fall during the course of last year.

With a dividend yield of 5.4% from a shareholder payout which is covered 1.8 times by profit, the company continues to have strong income potential. With the wider gaming sector continuing to enjoy good growth and M&A activity being a key part of its recent history, William Hill could yet become a bid target for an industry rival.

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Peter Stephens owns shares of United Utilities. 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.