There is nothing better than buying cheap stocks that also double-up as rewarding dividend stocks. And if I look hard enough they are definitely around. Here are three such that I think make great buys for my portfolio this October.
Rising profits bode well
The first is the general insurer Direct Line Insurance (LSE: DLG), which has a dividend yield close to 8% right now. The company has a long history of paying dividends, which gives me confidence that its future dividend will continue. There is no way of knowing if the company will indeed keep paying dividends, especially considering unexpected the mini-recession of last year. But I am hopeful.
For the first half of the year, Direct Line reported a 10.5% increase in pre-tax profits from the year before. And Direct Line generously increased its dividend as well. This follows its largely healthy profits over the past few years. Even though they have not risen consistently, I like the very fact that it has sustained profits. Its business could make gains over the next couple of years too, as the economy gets back on track. This too, should sustain, if not increase, its dividend levels further.
At the same time, Direct Line’s price-to-earnings (P/E) ratio is relatively subdued at 11 times. I reckon that can change though, if it performance keeps improving. I have already bought the stock, for that reason.
A cheap dividend stock with good prospects
Another dividend stock I like is the financial trading platform Plus500, with a dividend yield of 6%. This is partly thanks to the FTSE 250 stock’s falling share price, as I expect that its performance will correct after its exceptional results last year as investors bought and sold heavily during the stock market fluctuations.
Yet, this was to be expected. And there can still be good times in store. It was a big gainer on Monday, after it said that it expected its revenues and profits to be ahead of analysts’ expectations. Moreover, with a muted P/E ratio of 5.7 times, I think it may be only a matter of time before investors see value in the stock once again. And for that reason, it is a buy for me.
Eye-popping dividend yield
The third stock I like is also a trading platform called CMC Markets. I wrote about it earlier in the week but with its eye-popping 11% dividend yield, it bore reiteration. It has an even smaller P/E ratio compared to Plus500 at 4.5 times, as it share price falls. This happened as it revised down its profit expectations, disappointing investors. Yet, the combination of being a cheap stock with a high dividend yield makes me confident of its value. Besides that, its business is expanding too. I have bought the stock.
My concern
My only concern for these stocks is the uncertainty about tomorrow. While Covid-19 cases are thankfully reducing, supportive policies like the stamp duty holiday and the furlough scheme are being withdrawn. High inflation can dampen demand too. In a lacklustre economic environment, the stock markets may not be able to thrive without support. And that can affect all these stocks, though for now I am positive on them.
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Manika Premsingh owns shares of CMC Markets and Direct Line Insurance Group. 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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