Companies with above average dividend yields can offer a stable foundation of portfolio returns. They can indicate that a business has good earnings growth and they are adequately paying back shareholders. However, share price performance can cause a yield to expand incredibly if the market sells the shares off heavily.
It is only when we feel the company is being hit with short-term weakness, with strong chances to recover that a higher dividend yield should attract us. It always has to come back to the quality of the company and its long-term performance to see where fair value lies, even for dividends.
Spark Infrastructure (ASX: SKI) has a dividend yield of 6.77%, with its price-to-book value at 1.4 times. The infrastructure fund has investments in electricity and gas distribution and transmission, plus others in regulated water and sewer assets. Exposure to gas transmissions should benefit it, as the energy market is looking towards higher volumes of gas demand meeting expected supply shortages. This is due to the beginning of gas exportation to overseas customers in 2015 and beyond.
Mirvac Group (ASX: MGR) comes in with a current 8.14% dividend yield and price-to-book value of 0.97 times. The real estate developer, investor and investment manager raised its NPAT before abnormals by 10.5% in 2013 to $370.2 million, but above average abnormal charges of $241 million weighed heavily on the bottom line. It recently announced a $506 million long-term placement, which was oversubscribed by four times over the original target of $150 million, so the total value of the placement was upsized to $506 million. With its exposure to the housing market, it should benefit as increased housing construction is forecast.
ALS (ASX: ALQ) has a 5.88% dividend yield and a price-to-book value of 3.1 times. The testing and laboratory services provider has divisions in minerals, life sciences and energy and industrial, in locations around the world. Its share price has taken a tumble, down 17.6% in the past month to $8.04 after reporting a half-year decline in NPAT of 28%, compared to the previous corresponding period. Its minerals division was down due to less greenfield development and exploration in mining. Energy and life sciences also exhibited some weakness.
Insurance Australia Group (ASX; IAG) has a 6.3% dividend yield and a price-to-book value of 2.38 times. The general insurance industry market share leader has had a good run up in share price over the past year, from about $4.70 to its current $5.71. It is now considering a bid for Wesfarmers' (ASX: WES) insurance business, which is mostly for commercial insurance. A sale price hasn't been announced, but there has been talk that it might be up to $2 billion. The insurance business has more than 200,000 policies and in 2013 reported EBIT of $205 million.
Foolish takeaway
With dividends you need to also review the stability of past earnings since they are a proportion of net profit. Short-term share price decreases will inflate dividend yields, but that doesn't mean the share price can't go lower. The investor should always be focused on the business performance. If temporary bad business conditions are weighing heavy on a regularly strong and growing company, it could be an opportunity to lock in a good yield if you believe the share price will eventually recover.
