Look beyond the blue chips for the best bargains in British income stocks

A professional investor tells us where he’d put his money. This week: Chris McVeyof the FP Octopus UK Multi Cap Income Fund highlights three favourites.

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(Image credit: © Getty Images)

We believe that equity-income investors shouldn’t purely focus on the traditional dividend stalwarts at the top of the FTSE 100.

Across the entire UK equity market there are over 550 dividend-paying companies, many of which have more attractive earnings growth characteristics than traditional income sectors such as banks, miners and tobacco. This profit growth can in turn underpin attractive levels of payout growth.

We therefore judge stocks by three key attributes: a company’s dividend yield, of course, but arguably more importantly, the company’s earnings growth, and its potential dividend growth.

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Ideally, we are looking for stocks that we think can deliver on all three metrics, ahead of the wider UK equity market, through the cycle. This results in a multi-cap approach, with a bias towards faster-growing small and mid-cap firms, where we find many of the more interesting opportunities. Below we highlight three stocks we have held in the portfolio for some time, yet, we suggest, offer a potentially extremely attractive entry point for investors on a mid-term horizon.

Profitable pawnbroking

H&T Group (Aim: HAT) is Britain’s largest pawnbroker. Established in 1897, it has over 250

stores and offers customers a diversified product portfolio including pawnbroking, unsecured lending and foreign exchange. It is also the UK’s sixth-largest retailer of high-quality, pre-owned and new jewellery and watches.

The business delivered a fantastic performance last year, with profit growth of more than 140%. Looking ahead, analysts expect profits to expand at a compound annual growth rate (CAGR) of 38% to the end of 2024, with a potential dividend yield in excess of 5% this year. Despite these impressive metrics, the stock is still on a prospective price/earnings (p/e) ratio multiple of less than eight, well below its long-term average.

A diverse alternative-asset manager

Intermediate Capital (LSE: ICP) is a global alternative-asset manager. It currently manages approximately $75bn across a variety of strategies. Even though the fundraising environment has become more challenging, the business continues to make progress, recently reconfirming its ambitious fund-raising targets for the next two years.

Profit growth, underpinned by an increasingly diverse product range, has enabled the business to raise its ordinary dividend for 12 consecutive years, reporting 36% growth in the year to 31 March 2022. The group is expected to generate a dividend yield of 6.5% for the year to 31 March 2023, and on a prospective p/e of less than ten, this stock is on a discount to its long-term average valuation.

Cash in on corner shops

A leading independent wholesale business supplying the convenience-retail sector, Kitwave (Aim: KITW) operates from 29 depots across the UK and listed on Aim in 2021. The business has delivered attractive levels of growth both organically and through complementary acquisitions.

For the current financial year the stock is expected to produce revenue growth of more than 13%, adjusted profit growth of over 24%, and an attractive dividend yield of 4.3%. Despite this excellent record since listing, and these appealing metrics, the stock is again attractively valued, trading on a prospective p/e multiple of only ten.

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.