Generate a second income stream with these dirt-cheap dividend stocks

The Motley Fool
A person holding onto a fan of twenty pound notes
A person holding onto a fan of twenty pound notes

Whether you’re wanting to supplement your salary or add to the State Pension, buying a bunch of quality, dividend-paying stocks can be a great option, even more so if these companies are purchased at cheap prices.

Here are two companies that I think could be great medium-to-long term investments, even if recent performance might suggest otherwise.

Down but not out

Having fallen 25% since last month’s Q1 trading update was released to the market, it’s not been a great few weeks for spread betting firm IG Group(LSE: IGG).

Revenue of £128.9m over the three months to the end of August was 5% lower than over the same period last year (£135.2m) — something the company attributed to the fact that markets have been relatively calm in 2018. When things are so settled, IG makes less money because clients are less likely to take positions.

Of course, recent regulatory changes including the prohibition of binary betting to retail traders from the beginning of July coupled with new measures surrounding CFDs from the start of August haven’t helped matters. It’s still too early to say what the full impact of these changes will be. And, as we all know, markets hate uncertainty.

Nevertheless, it’s worth remembering that IG had already warned that revenue would be hit following a reduction in trading volume by retail clients. In this sense, the recent fall feels overdone.

Personally, I think the shares are starting to look great value again. A forecast price-to-earnings ratio (P/E) of 12 looks very reasonable considering the firm’s market-leading status, bulletproof balance sheet and consistently solid returns on capital. Moreover, it shouldn’t be forgotten that over 50% of revenue achieved from the EU and the UK in Q1 was from clients categorised as ‘professional’.

Make no mistake, IG isn’t going to the dogs. With its German subsidiary having now received a licence in principle (allowing the company to continue to trade in all EU states post-March 2019), even Brexit is unlikely to have much of an impact.

Perhaps the biggest draw at the current time, however, is the juicy 6.5% dividend yield. Even if the payout were to be trimmed, I’d still consider this adequate compensation while the company fully adapts itself to the new regulations.

Great value

Another quality company offering decent dividends is internet marketing group XL Media(LSE: XLM).

As summarised by my Foolish colleague G A Chester last month, the small-cap has endured a difficult 2018 with its share price taking a severe hit in June following a profit warning. September’s interim numbers failed to convince some investors to stay for the recovery, with the shares down another 15% by the end of trading yesterday.

Of course, quality companies experiencing temporary issues can be a source of riches for patient investors. On less than 9 times forecast earnings for the current year (reducing to 8 in 2019 if analyst estimates prove correct), XL Media could turn out to be another example of this. Like IG, it has a history of generating great returns on the money it invests coupled with seriously good operating margins.

Although some might be concerned by the 25% reduction to the interim payout (from 4 to 3 cents per share), a 4.9% dividend yield for the full year still looks good to me, assuming the final dividend is reduced by the same amount.

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Paul Summers 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.