3 shares with high returns on equity and strong dividends to buy today

Find out why stocks with high return on equity like JB Hi-Fi Limited (ASX:JBH), Hunter Hall International Ltd (ASX:HHL) and Tamawood Limited (ASX:TWD) can mean more stable dividend income.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When hunting for stocks that can provide dividend income, it's all too tempting to simply compare the headline yields of different companies. However, you can improve your chances of identifying companies that can pay strong dividends for a longer period by refining your method.

By also seeking out companies with a strong return on equity (ROE) you are more likely to find those businesses which will continue to be able to pay strong dividends in the future. Return on equity is simply net profit divided by average shareholder equity.

Rising profits on the same amount of equity means rising ROE. Stable profits generated using higher equity means a falling ROE. Therefore a higher ROE is generally an indicator of a more efficient, more sustainable business.

The three stocks on this list are very different, but each have ROE that is well above average, and dividend payouts that are less in danger of being cut (for the purposes of this article, all ROE data is taken from Commsec as at 26 April 2016).

The retailer

JB Hi-Fi Limited (ASX: JBH) is a familiar stock and business to many, but few would suspect that the cheap and cheerful store fitout hides a market-beating ROE.

For the past three years, JB Hi-Fi has consistently achieved ROE of above 40%, which is a sector-leading result. A focus on inventory control, disciplined management of costs and a growing online offering all mean that profits grow without the need for huge additional funds.

With a move into home appliances as a "store in store" concept within its existing sites, JB should be able to capture additional retail spending without having to invest in a costly new phase of store rollouts. JB currently trades with a solid dividend yield of 4.4%, fully franked.

The fund manager

Hunter Hall International Ltd (ASX: HHL) is one of several fund managers listed on the ASX. While it is less high profile than some of its peers, its share price has actually jumped over 50% in the past year, while other fund managers have struggled.

Funds management is an attractive business model with high operating leverage, which means that each dollar of additional profit costs less to generate, as efficiencies of scale are reached.

Hunter Hall achieved ROE of between 22% and 55% in the financial years between 2010 and 2013. Its most recent year ROE was only 11%, however. If its ROE can return to its historical levels, the dividend yield of 7.6% should prove very enticing to income investors.

The home builder

Tamawood Limited (ASX: TWD) is a home building and construction company with a difference. Instead of buying land, and developing large-scale projects and selling them like a traditional developer, it takes a different approach.

Tamawood contracts directly with home builders, providing affordable homes under the Dixon Homes brand. Instead of large scale multi-dwelling projects, Tamawood delivers single homes, which protects it from the worst of the swings of the building cycle.

It also operates a franchise model across Australia, where it uses its scale to buy building materials and supply those materials to its franchisees. This model means that the franchisees pay far less than they would if they were buying materials in lower volumes as independent contractors.

The value of this capital light strategy shows up in the numbers, with ROE between 60% and 75% in the past three years, alongside a current dividend of over 8%.

Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »