Forget the cash ISA! These bargain dividend stocks are riskier but could be far more rewarding

Arrowings ascending on a chalkboard

European-focused credit collection specialist Arrow Global Group(LSE: ARW) has flown more than 9% in early trading after posting a 28.4% increase in profit after tax to £20.5m in the nine months to 30 September.

On target

This will come as a welcome relief to investors after a dismal year which has seen the share price fall 54%, while the stock is also down as measured over five years. So is this just a relief bounce or does it point to an extended recovery?

Arrow’s management hailed a strong group operating and financial performance. Highlights included an 18.2% increase in core collections, driving a 28.8% increase in adjusted EBITDA, while underlying profit after tax increased 10.2% to £42.9m.

Bullseye!

The group also hit the mark with an underlying 33.4% return on equity over the last 12 months, while an improved underwriting performance increased to 104% of original forecast.

Arrow’s investment business also performed well with record organic portfolio acquisitions of £200m, up for £155m in Q3 2017, while third-party asset management and servicing business income increased 25.1% to £63.3m. Balance sheet management looks prudent.

All of a quiver

I wrote in August that Arrow has looked a tempting buy for some time, so I am pleased to see the stock flying true. The £393m company now offers a stunning forecast yield of 6.4%, with cover of 2.9. 

Earnings per share (EPS) growth has been strong since it joined the main market in 2013 and is expected to continue with 12% growth this calendar year and 22% in 2019. By then the yield is forecast to hit 7.9%. One warning: a recession could make collections harder, and City forecasters reckon operating margins will fall from 33.2% to 20.2%. However, trading at just 5.3 times forecast earnings, these worries look to me like they are in the price.

Power of 3i

You don’t find many companies trading on such a cheap valuation but I’ve just discovered one on the FTSE 100. Private equity and infrastructure specialists 3i Group(LSE: III) stands at just 5.7 times earnings, and even though this is forecast to rise slightly to 7 times that is still a pretty tempting discount.

The £8.4bn group, which focuses on northern Europe and North America, has seen its stock fall 9% in the past year, although it has still grown 127% over five years. It also offers a decent forecast yield of 3.7%, with cover of 3.9.

Cash is King

3i buys businesses with the aim of improving them and then selling them for a profit. As a result, profits vary depending on the timing of acquisitions and sales, although Q1 started well, with the group generating total cash of £868m, principally from the £835m million received from the sale of Scandlines in June, but with £535m reinvested.

Its balance sheet also looks solid, with net cash of £638m at June 30, before spending £213m on its full-year dividend in July.

As I wrote earlier, EPS are forecast to fall in the year to 31 March 2019, by 18%, then another 1% in the year after that, but that is the nature of the group. Both stocks are risky, but long-term investors may well reap the rewards.

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harveyj 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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