This unloved 8% yielder could make you very rich

Today I'm looking at a super-high-yield stock and one where the dividend is currently suspended. Both of these are potential value picks, but for different reasons. What I want to do is to decide whether either stock is likely to beat the market over the next couple of years.

Moving in the right direction

Today's half-year results from bus and train operator FirstGroup (LSE: FGP) revealed some attractive trends. Excluding exchange rate movements, revenue rose by 3.5% to £2,771.3m. Adjusted pre-tax profit was 2% higher on the same basis, at £30.5m.

However, the group's statutory figures, which include exchange rate effects and one-off costs, made for grim reading. FirstGroup reported a pre-tax loss of £1.9m for the period, due to the impact of finance costs on a reduced operating profit.

These results might have been a little better, but profit margins in the group's US-based First Transit business were hit by hurricanes in Puerto Rico and driver shortages in the US. In contrast, profit margins at the UK-based First Bus and First Rail businesses improved slightly.

The good news is that despite these challenges, net debt fell by 20% to £1,179.9m during the first half, compared to the same period last year.

This reduction means that the group's ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) has fallen from 2.4 times to 1.7 times over the last year. This is a key metric used by many lenders. My personal preference is for net debt-to-EBITDA to be below 2 times, so I'm encouraged by FirstGroup's progress in this area.

If this reduction is sustained, it should also strengthen the case for dividend payments to resume next year.

Time to hitch a ride?

Is now the right time to buy into its recovery story? I think it could be. The shares certainly don't look expensive to me. Today's results show decent cash generation and are in line with broker forecasts for the full year. These suggest the firm will generate adjusted earnings of 12.9p per share, giving a forecast P/E ratio of just 8.3. I believe the shares could be a profitable long-term buy at this level.

Buy or sell this 8% yield?

The 8% yielder I mentioned earlier is housebuilding and construction group Galliford Try (LSE: GFRD). It's a slightly odd situation.

While housebuilding stocks in general have performed strongly over the last three years, Galliford Try shares have been flat over the same period. The main reason for this seems to be the group's construction business. Back in May the company revealed a shocking £98m of one-off costs needed to complete some of its legacy construction contracts. This undermined the group's profits last year, which fell from £108.9m in 2016 to just £48.7m.

However, these problems do appear to be genuine one-offs. The group's after-tax profit is expected to bounce back to £139.2m for the year ending June 2018. This puts the stock on a forecast P/E of 7, with a prospective dividend yield of 8.3%.

I'd normally be fairly cautious about such a high yield, but this payout should be covered 1.7 times by earnings. The firm recently reported "good market conditions" across its business. If this situation continues, these shares could be a rewarding buy at current levels.

5 dividend stocks you shouldn't ignore

If you're hoping to build a high-yield portfolio to help fund your retirement, I wouldn't pin all of your hopes on FirstGroup and Galliford Try. Both are heavily cyclical businesses, prone to booms and busts.

I'd be more tempted to weight my portfolio towards some of the stocks featured in 5 Shares To Retire On. This exclusive Motley Fool report contains details of five defensive income stocks on which our experts have buy ratings.

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Roland Head 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.

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