Much has been said about the stock market’s rapid rise since mid-last year with the expressions “yield compression” and “yield chase” becoming almost common vernacular.
These terms refer to the current situation where investors are concerned about the low interest on their bank deposits, but are also still sore from the GFC, such that many investors want to own the same high yielding, “safe,” blue-chip companies. In short “the market” is chasing Telstra (ASX: TLS), the four major banks and a handful of other defensive stocks such as Woolworths (ASX: WOW).
This demand is pushing share prices higher and hence the yields on stocks lower. Of particular concern is the possibility that some investors are purely focussed on the yield they are buying without considering the valuation risk of overpaying for a stock.
A 5% yield might look good, but if the stock price subsequently halves and the yield expands to 10%, an investor won’t be ahead!
Below I have highlighted three companies that are all currently trading on yields of over 7%. Their balance sheets appear sound, their dividends should be maintainable and at current prices they don’t appear overvalued.
Ardent Leisure (ASX: AAD) is a leisure and entertainment company with assets including the Dreamworld theme park in Queensland and the AMF bowling chain. The company has also expanded into the US.
Bradken (ASX: BKN) is exposed to the resource sector, which does raise its risk provide. However Bradken specialises in the supply and service of “wear components” for mining and earthmoving equipment, which means it is primarily focussed on active, producing mines and not beholden to resource prices or exploration.
K&S Corp (ASX: KSC) is a transport and logistics company that is well managed and poised for any rebound in economic activity levels. Its share price had a good run earlier in the year but has since retraced much of those gains.
Above are three companies which are a starting point for Fools who are wary of chasing the blue chips higher and are keen to do further research of their own.
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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in Bradken.
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