Value stocks

2 “secret” value stocks I would buy to increase my dividend income!

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Most retail investors focus on buying FTSE100 and FTSE250 shares. And there is nothing wrong with that. Both indexes are full of high-value stocks to buy after the high stock market volatility of 2022.

However, looking further can help increase an investor’s long-term returns.

Small cap companies like penny stocks are out of favor with many investors. It gives those who take the time to explore London Stock Exchangelesser-known companies a chance to unearth undervalued beauties.

Here are two “secret” value stocks I would buy to increase my dividend income. Each costs less than £1 to buy.

Michelmersh Brick Holdings

Rising interest rates pose near-term threat to brickmaker Michelmersh Brick Holdings (LSE: MBH). Demand for penny stock products could fall if they cause a real estate crash.

That said, I still think the company’s earnings will skyrocket in the long run. Britain’s chronic property shortage and growing population mean homebuilders will need to ramp up house production over the next decade.

Analysts from the National Housing Federation estimate that the UK will need to build 340,000 new homes between 2019 and 2031. This should naturally be a major catalyst for demand for bricks.

In addition, the aging UK housing stock provides Michelmersh with excellent long-term opportunities. The average age of a home there is among the highest in Europe. Thus, product sales to the repair, maintenance, and improvement (or RMI) industry could increase significantly over time.

Michelmersh is currently trading on a forward price-to-earnings (P/E) ratio of 8.7x. This leaves a wide margin of safety.

The company also posted a dividend yield of 4.9%, better than the market. And the planned dividend is covered 2.3 times by the anticipated profits.

This offers a decent compensation to dividend investors should earnings disappoint.

Platinum Sylvania

Investing in mining stocks can be a risky business. The complex activity of mining can be expensive. Common problems in the exploration, development and production phases can also leave revenue forecasts in tatters.

These risks are reflected in the low P/E ratios of many mining stocks. Take Platinum Sylvania (LSE: SLP) for example. This South African-based company trades on a forward earnings multiple of 3.7 times.

My view is that the price of Sylvania could skyrocket as action to address the climate emergency gathers pace.

Platinum and palladium are key materials in car and truck exhausts. And lawmakers in major regions are demanding higher loads of materials to filter out harmful emissions.

Platinum is also a key ingredient in making green hydrogen. This provides excellent opportunities for stocks like Sylvania as the shift to fossil fuels intensifies. Analysts suggest the green hydrogen market could grow at an annualized rate of almost 30% by 2030.

One last reason why I like Sylvania stocks: at current prices, the penny stock has a dividend yield of 8.2%. Moreover, the expected earnings cover the dividend by 3.3 times.

The 2 “secret” value stocks I would buy to increase my dividend income! first appeared on The Motley Fool UK.

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Royston Wild has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.

Motley Fool United Kingdom 2022