Dividends are useful for a number of reasons. In Australia, many investors choose to invest their superannuation in shares and use their dividends to fund their living expenses. This approach can be both tax effective and far more rewarding than a term deposit, especially with interest rates so low.
However, there is some risk choosing stocks for their dividends, as dividends may well be cut in the future. Here are seven stocks that I think will continue to pay impressive yields in coming years.
Tamawood (ASX: TWD) is my favourite company yielding over 7%. Tamawood sells designs for houses, and manages its construction. Its activities are not capital-intensive. It provides services such as sales, soil tests, surveys, drafting, costing, purchasing, and project management. Generally, it does not own the development. However, the company's forays into the solar industry and its opportunistic purchases of distressed land demonstrate innovation and adaptability.
The opportunistic income from buying and developing distressed land is now in the past, and the FY 2013 profit was considerably lower than FY 2012. Nonetheless, cash flow remains very strong, and the company has no debt. Better yet, it is exposed to home construction, which has shown strong growth in the last year, and is reasonably likely to continue.
The founder of the business, Lev Mizikovsky, is a non-executive director and holds over 50% of the company. Investors should note that the company would probably not be able to pay such a high dividend if the founder did not re-invest his dividend. He recently bought shares at $3.04.
Another option for income seeking investors is Prime Media (ASX: PRT). Prime is the regional affiliate of Seven West Media (ASX: SWM) and sells advertising in regional areas. However, as Tim McArthur points out in this excellent article, Prime will have trouble growing profits in FY 2014. Nevertheless, the company yields over 7% and, if the media reach rule is removed, may even become a takeover target.
Investors may also consider infrastructure play SP Ausnet (ASX: SPN) an owner of poles and wires that deliver electricity to homes. The company yields about 7.3% at current prices, but the dividend is not fully franked. Personally, with rising electricity costs and the falling cost of solar, I think this industry is undergoing quite some transformation. I'm happy to avoid it for the time being.
A better option would be Corum Group (ASX: COO), a company that sells software to pharmacists, and payment platforms to real estate agents and local governments. The products are extremely sticky and require minimal capital investment. However, I consider this stock a bit risky, because the company faces competition from larger players, and has not always been well managed. Nevertheless, I find the 9.6% unfranked dividend quite tempting.
Korvest (ASX: KOV) is one of the few Australian manufacturers that I would consider. The company makes specialised galvanized steel products, and boasts honest and competent management. A weaker Australian dollar should help Korvest, although it will also be impacted by reduced activity in the mining sector. The company currently yields 7.3%, but there is a significant risk its dividend won't be sustained.
One fairly safe option for dividend seekers is Metcash (ASX: MTS). Metcash is a distributor of liquor and groceries, and competes with the likes of Woolworths (ASX: WOW) and Coles. I think over the long term Metcash will do well for investors, as it appears to be well managed. I think that independent retailers will survive, despite the enormous pressure from the big two.
At current prices Metcash yields over 9%, fully franked, but it has recently cut its interim dividend and its final dividend is likely to follow. However, even after the dividend is somewhat reduced, the company will still provide solid income to investors, likely to be well over 7%.
Finally, DWS (ASX: DWS) is an IT services company that yields over 8.4%, fully franked. The company suffered declining earnings in FY 2013, but I don't think this is a permanent state of affairs. Even if the company is not growing, I think it is a long way from meeting its demise. I hear that the company continues to retain top talent, and its founder, Danny Wallis, continues to head up the organisation.
Foolish takeaway
It's quite reasonable to choose a couple of companies that have impressive dividend yields, as long as their long-term prospects are reasonable. The income from the dividend can pay your living expenses, or give you the opportunity to invest in your best ideas in the future, without having to sell your shares.
