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8% dividend yield — too good to be true?

A scan of the industrials sector for companies with dividend yields of 8% or more, based on trailing dividend payments, produces a list of over 50 stocks. At first glance many of these companies, which are well known and quite widely held by investors might look enticing, however on closer inspection there is a cloud over whether these companies will be able to maintain their dividends or be forced to reduce.

If it looks too good to be true, then it probably isn’t true!

For example Emeco Holdings (ASX: EHL) which is a major supplier of earthmoving equipment to the mining sector has a historic yield of almost 14%. The slowdown in demand is having a dramatic effect on its business with the global utilisation rate of its fleet currently at only 55%. This slowdown has forced the company to lower guidance for its full year results.

Meanwhile national accounting firm WHK Group (ASX: WHG) is trading on a dividend yield of 10%. WHK was recently engaged with SFG Australia (ASX: SFW) regarding a merger of the two groups. A profit downgrade and concern over the outlook for WHK led to SFG walking away in recent weeks which sent WHK’s share price tumbling to multi-year lows.

Thirdly, Service Stream (ASX: SSM) is trading on a yield of around 9%. The contractor to the National Broadband Network (NBN) has experienced delays and the loss of its Northern Territory NBN roll-out contract and in the process reduced its earnings guidance and announced expectations of impairments write-downs.

tmchart1

Source: Google Finance

As the chart above shows, companies trading on high yields are generally under some sort of pressure which has pushed their share price down and yield up. In the examples above, the stocks have underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) by between 40% and 75% in the last 12 months!

Foolish takeaway

Sometimes a company slip up is temporary and just a short-term blip and sometimes a company has robust earnings power which means it can still pay its historical level of dividend even when the market is marking its price down over some particular issue. Investors can, if they are very careful and diligent find opportunities amongst very high yielding stocks, however the caveat buyer beware should be remembered.

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More reading

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 does not own shares in any of the companies mentioned in this article.

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