As we begin the current 2015 financial year, one theme which is almost certain to continue dominating the investment landscape is low interest rates and investor demand for yield.
Yes, that's right – FY 2015 will continue to be about 'the yield trade'. Most income-seeking investors have focussed on owning blue-chip stocks such as Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS). It's understandable that investors have flocked to these stocks given the defensive quality of their revenues and earnings help provide for a secure dividend. The worry however is that many of these same investors are disregarding the potential risk from loss of capital, believing (incorrectly) that blue-chip stocks won't decline in value.
Unfortunately this just isn't the case. A blue-chip company can still rise to over-valued territory, ultimately leading to both capital loss and underperformance.
A better alternative
Investors keen to achieve a high level of dividend income would arguably be better off casting a wider net (although a wider level of diversification will also be required) and identifying smaller stocks that not only offer significantly higher yields but also offer value.
Today saw the release of FY 2014 guidance from engineering services firm E&A Ltd (ASX: EAL). While the announcement stated that, "net profit after tax will be comparable with the record profit of $7.7 million after tax recorded in the previous year," the market had been expecting profit growth. As a result the shares have been sold off by 15% on Monday morning.
Despite the market's negative reaction, not only is E&L providing guidance that it has maintained a record level of profitability but it also announced $75 million in new contracts. The guidance suggests the firm should be able to pay a dividend at least in line with the prior year's final dividend of 2.5 cents per share (cps). Having paid a total of 4cps in FY 2012, 5 cps in FY 2013, a dividend in FY 2014 of 5.25 cps looks likely (if not conservative). Assuming a rate of 5 cps is achievable in FY 2015 then taking today's share price plunge to 50 cents into consideration, E&L is trading on an appealing forecast fully franked dividend yield of 10%.