Centrica plc isn't the only bargain dividend stock I'd buy with £2,000
With the Centrica(LSE: CNA) stock price having fallen by 35% in the last year, it now has a dividend yield of 8.6% for the current year. This is likely to appeal to a wide range of income investors, largely because it is nearly three time the rate of inflation.
However, there could be more to the company than simply a high dividend yield. Furthermore, it's not the only income stock which could be worth a closer look at the present time. Reporting on Monday was a dividend growth stock which could offer high returns.
Improving performance
The company in question is ventilation products supplier Volution (LSE: FAN). It released a positive set of interim results which showed a rise in revenue of 11.6%. Organic revenue growth was 6.3%, while inorganic revenue growth was 5.3%. This boosted its adjusted operating profit by 6.7% to £18.3m. Operating margin decreased by 90 basis points, as expected, due to the impact of acquired businesses which have lower margins than the rest of the company.
Volution also announced the acquisition of Simx Limited. It is a market-leading residential ventilation products supplier in New Zealand for both new and refurbishment applications. This could help to boost the company's financial performance, with it expecting to make further progress in future periods.
Since the company's bottom line is due to rise by 6% in the current year and by a further 7% next year, there seems to be scope for an inflation-beating rise in dividends. Although it has a dividend yield of just 2.2% right now, shareholder payouts are covered 3.3 times by profit. This suggests that they could increase at a much faster pace than profit over the medium term without hurting the financial strength of the business.
Turnaround potential
Clearly, Centrica's dividend yield has more appeal at first glance than almost any other stock in the FTSE 350. However, the company continues to experience a difficult period as it seeks to fundamentally change its business model. Its strategy may be sound, with it seeking to generate major cost savings and transition towards a more efficient business in the long run. However, uncertainty regarding regulatory change has weighed on its performance and this has caused investor sentiment to weaken.
Today, Centrica trades on a price-to-earnings (P/E) ratio of around 10. Even though it has a challenging outlook, this suggests that investors may have fully factored-in the problems it faces as political risk for the domestic energy supply sector remains high. In fact, the stock appears to have a wide margin of safety that could equate to strong growth over the medium term - especially since it is expected to record a rise in earnings of 7% in the current year.
Certainly, its stock price could be volatile and its prospects of dividend growth may be limited. But its total return potential still seem to be impressive.
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Peter Stephens owns shares in Centrica. 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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