A generous dividend is all well and good, so long as the company sticks around long enough to keep paying it out, but that's never a given. In that spirit of realism let's look at three companies with strong yields that look like they're going to be around awhile.
Each of our three companies will be consumer-facing, so the business models will be easy to understand. Each will be a strong performer in its market space that can make, market, and distribute its products with machine-like efficiency. And each will be a profit-making dynamo, producing goods that people need to buy over and over.
Without further ado:
1. Woolworths Limited (ASX: WOW)
Where better to start a list of 'repeat purchase' businesses than the place many of those purchases actually happen.
The grocery, liquor, discount department store and hardware behemoth covers the waterfront of consumer spending, and is on track for an annualised sales figure of close to $50 billion. Not bad for a business that started life with a single store in 1924 and didn't open its first supermarket until the 1960s. It's hard to go into a shopping centre or drive for more than 10 minutes in metropolitan centres without seeing a Woolworths supermarket, Big W department store, BWS bottle shop or Woolworths Petrol canopy. The same now applies to our trans-tasman cousins, with Woolworths now a strong player in New Zealand.
The food and liquor businesses are still the powerhouse of the company and despite growth trailing arch-rival Coles (owned by Wesfarmers Limited (ASX: WES)), Woolworths is still the larger of the two retailers and makes the best margins. When it's time to restock the pantry, odds are you'll end up in a Woolies store.
With a 4.8% fully franked trailing dividend, you're being well compensated for an investment in the ultimate in must-have shopping destination.
2. NIB Holdings Limited (ASX: NHF)
Private health insurers have been in the news quite a bit recently with the federal government securing support from the cross-benches to means-test the private health insurance rebate.
While that change is likely to have some impact on health insurers such as NIB, the company's best estimates are that only 0.6% of policy-holders will drop their cover and another 2.3% may reduce their level of cover. These are quite small impacts, and NIB expects to more than offset this loss with organic growth.
The business is performing very well, delivering revenue and profit growth, and increasing its return on shareholders' equity from just under 15% to 18% in the most recent half year (on an average basis).
While not a business many people think of as a repeat business, consumers' inertia to change health funds once they have selected one, and the regular monthly contributions make health insurers one of the ultimate in repeat-purchase businesses.
NIB is currently trading on a trailing dividend yield of 9% fully franked. The level of dividends may come under some pressure if the company's estimates of the impact of means-testing are proven to be optimistic, but the current yield leaves plenty of breathing space, and the company has made clear its intention to continue to return funds to shareholders in the absence of better uses for the company's cash.
3. Telstra Corporation Limited (ASX: TLS)
Other than perhaps BHP Billiton (ASX: BHP), Telstra has likely garnered more column-inches of newsprint and online space than any other ASX company. Between the politics of the privatisation and now structural separation, and the fate of shareholders who bought shares in each of the three tranches, Telstra hasn't suffered for wont of attention.
Anchoring – or fixating on some previous price or turn of events – can be a costly investment mistake. Many investors still remember Telstra at $7.00, and are still licking their portfolio wounds. Bygones must be bygones, however – and fresh eyes are needed.
With the issues of structural separation and the NBN now behind it, Telstra can get on with life as a reseller of NBN services, and operator of its increasingly popular 3G and 4G mobile networks. David Thodey and his team are doing a good job of turning Telstra into a consumer-facing retail company, completing the move away from decades of what was essentially infrastructure provision.
The worst of Telstra's corporate performance – and share price falls – are likely behind it. You should never say never, but the future should be brighter than the past.
Telstra is currently offering a fully-franked 8.5% dividend yield – and while the dividend was previously being paid from borrowings, the free cash that the business is generating is putting the dividend on a much more sustainable trajectory. Again, there are no guarantees, but the Telstra board understand their constituency well.
With capital growth never certain, investors can do much worse than lock in some good dividends with these three businesses. Especially for beginners, but essentially for all of us, a solid, healthy dividend stream is a tax-effective way to receive investment gains from these companies, and provide us the opportunity to reinvest those dividends in the months and years to come.
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Scott Phillips Is The Motley Fool's feature columnist. Scott owns shares in Woolworths and Telstra. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.