2 cheap income stocks you should consider buying right now

Investing in the FTSE 100

While the FTSE 100 may have risen to a record high in 2017, there are a number of companies which offer low valuations. In many cases, this is because their outlooks are highly uncertain. However, in other instances the companies in question have upbeat growth prospects. Furthermore, they often offer the potential for improving income prospects. With that in mind, here are two stocks which appear to be worth a closer look.

Solid performance

Reporting on Friday was engineered components supplier Tyman (LSE: TYMN). Its performance in the first part of the year has been in line with the board’s expectations and shows that its strategy is working well during what is traditionally a period of lower sales activity. For example, revenue increased by 31% versus the same period of the prior year. However, on a constant currency, like-for-like (LFL) basis, revenue in the period was flat on last year. This was mostly due to the positive impact from acquisitions, as well as the strength of the US dollar.

Looking ahead, Tyman could experience further rises in input costs. This is likely to have a negative effect on profitability, although it is seeking to manage this through a combination of effective purchasing, price management and cost reduction programmes. The company is forecast to record a rise in earnings of 11% this year, followed by further growth of 7% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 12.5, which suggests they offer excellent value for money.

Since Tyman has a payout ratio of just 40%, its dividend growth could be higher than inflation over the medium term. With a dividend yield of 3.3%, it could become a strong income prospect with capital gain potential.

Growth potential

Also offering strong growth potential is acquisition specialist Melrose Industries (LSE: MRO). It is expected to report a rise in earnings of 118% in the current year, followed by further growth of 16% next year. This has the potential to improve investor sentiment even further following its 20% share price gain since the start of the year.

Despite its recent capital gain, Melrose Industries continues to trade on a relatively low valuation. For example, it has a PEG ratio of 1.3, which is relatively low for a diversified operator in the industrials sector. Therefore, there is scope for a higher rating, which could be realised if the company is able to meet its optimistic earnings forecasts.

With a dividend yield of 1.7%, it may not appear to be a strong income play. However, since shareholder payouts are covered around 2.6 times by profit, there is scope for a rapid rise in dividends over the next few years. They could even beat the rate of earnings growth and turn Melrose Industries into a highly attractive dividend stock, as well as a value and growth opportunity for the long term.

Making a million

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More reading

Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Melrose. 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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