While most of us are aware of the large, Top 100 stocks, there also opportunities further down the scale. Telstra (ASX: TLS) isn’t the be all and end-all of dividend shares!
Fleetwood has been in business for over forty-five years making caravans and portable accommodation. The growth story for Fleetwood in recent years has flowed from building and operating accommodation for workers on resource projects such as the Searipple Village in Karratha W.A., providing classrooms and temporary working facilities for the public sector and the manufacture of recreational vehicles.
Fleetwood has benefitted from the resources boom and the rise of the “grey nomad”. The company has been conservatively managed with a return on equity (ROE) in the mid twenties and an excellent stream of increasing, fully franked dividends. They are expected to have earnings of about 90c per share this financial year (ending June 2012) and around 10% growth next year. With a share price of around $12.80 they are fairly priced and offer a dividend yield of 5.7% which grosses up to about 8% after franking.
The risk is that while managing and operating villages for resource project workers provides long term, repeatable income, if the resource boom fades away and the projects are wound down, this would have a serious effect on profitability.
IMF is a litigation funder. In return for a sizable share of any damages, IMF picks up the legal bill for certain court cases. The company gets to select the cases it funds and it only funds cases that it believes it has a very good chance of winning, the case is for a substantial amount of money and that the loser has deep enough pockets to pay the damages. There are relatively few of these cases and they typically take a long time reach a conclusion, so a key consideration is the existing stream of cases. As of March this year, IMF’s ‘pipeline’ consisted of around 27 cases with an estimated claim value of some $1.5 billion.
A final dividend of 10c per share has been declared and the shares trade ex-dividend on 23rd August. The full year dividend was 15c fully franked which is a yield of 10% on a share price of $1.50, grossing up to about 14.3% after franking.
As a litigation funder, focussed on winning large, irregular verdicts, income is very lumpy and most months IMF doesn’t have any income. Losing a few cases out of twenty-seven would impact forecast profits.
Mortgage Choice is a mortgage broker with a national network of franchises. The company does not ‘originate’ mortgages and has zero long term debt. It generates revenue both at the time a new mortgage is approved and on an ongoing basis while the loan is in operation. It had a loan book of $43.5 billion as at March this year and wrote new loans worth $5.6 billion in the first half of this financial year representing some 4% of the total mortgage market. At around $1.40, Mortgage Choice trades at an undemanding P/E of 6.3 and is expected to yield about 9% in dividends plus franking which rounds to about 13% after franking.
Of course, the housing market may remain weak for a while, and the major banks who are the mortgage originators might reduce the commission they pay to brokers such as Mortgage Choice.
These three companies seem to make a success of their niches and are all aware of the need to reward their shareholders through substantial dividends. Though there are always risks, especially with smaller cap stocks, you could do worse than to diversify into any or all of these with a reasonable expectation that the dividends should keep rolling in.
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Motley Fool contributor Tony Reardon owns shares in Telstra, Fleetwood, IMF (Australia) and Mortgage Choice. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.