Is it possible, in this age of low interest rates, that shares of one of Australia's most well-known brands could yield 11% but still be shunned by most investors? At a time when term deposits are yielding between 3% and 4% before tax, investors are flocking to stocks that produce seemingly 'safe' dividend yields at 6% or 7% before tax.
The problem is that many of these popular stocks now trade on such a high price-to-earnings ratio that there is a huge risk investors will lose capital over the next few years.
The big four banks, Telstra Corporation Ltd (ASX: TLS), Insurance Australia Group Ltd (ASX: IAG), Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW) have been investors' favourites, but as IAG and Woolworths shareholders will know, a small change in earnings can have a big impact on the share price. Woolworths' share price has fallen nearly 25% over the last year, well above the 5% yield investors received!
11% Yield Opportunity
An opportunity exists for investors to buy shares in a company that, yes, has its fair share of challenges and risks, but also rewards shareholders for taking on that risk with an 11% grossed up yield.
Shares in Myer Holdings Ltd (ASX: MYR) have fallen 16% over the last week following the shock announcement that CEO Bernie Brookes and CFO Mark Ashby would leave the company.
While this is bad news for current shareholders, analysts expect that Myer could pay out a dividend of 13 cents per share this year on earnings per share of 15.5 cents. The same analysts believe that the 2015 financial year (which ends in July) will be the cyclical low point for Myer's earnings, indicating that the payout could increase in coming years.
Risks
When investing in companies for their yield, investors HAVE to be aware of the risks. Competition is a major one, not just for companies like Myer, but also big groups like Woolworths and Wesfarmers. Myer also pays rent on stores and warehouses, which could increase, and an increase in revenue is reliant on consumer sentiment improving, but investors may consider that these risks are worth the income potential.
