The official cash interest rate is now at 2.75%. While investors can find bank accounts with deposit rates higher than this, a company paying a dividend yield over 6% plus offering the potential for capital appreciation can be a much more appealing option.
Many investors have indeed followed this train of thought, which has led to what has been termed the ‘yield trade’ or ‘chase for yield’. All these terms imply, is that investors have sought out returns in stocks that are greater than the returns they would receive from a bank account, while at the same time focussing on stocks that are so safe as to be equivalent to a deposit account.
Of course an investment in a stock is never without risk, so there is no way it could ever be as safe as a bank deposit. In seeking out safety however, investors have focussed on what they believe are the soundest investments, with the strongest balance sheets and that can sustain their dividend payments. This has led investors to crowd into stocks such as Telstra (ASX: TLS).
A scan through the share tables identifies lots of juicy dividend yields, some which might look ‘too good to be true’. As one might expect, things that look too good to be true often are! Published dividend yields can give a false impression for numerous reasons including the financial health of the company and the future outlook for dividend payments.
With those key measures in mind, three companies with forecast grossed-up dividend yields for financial year 2014 (FY14) greater than 6% that may be worthy of further research are:
- Ardent Leisure (ASX: AAD) which owns theme parks, marinas, bowling centres, cinemas and health clubs. The balance sheet is sound and the company is expected to grow earnings in FY14 and trades on a 7.6% yield.
- Thorn Group (ASX: TGA) owns retail stores including Radio Rentals and Rentlo, however its business really is the rental and financing of white goods, electronics, furniture and personal loans. Thorn also boasts a solid balance sheet and a forecast dividend yield of around 7%
- Premier Investments (ASX: PMV) owns a suite of retail fashion chains including Just Jeans and Dotti. The business is also expanding the Smiggle brand and the balance sheet is flush with cash. Earnings growth is expected and the yield is over 7%.
The ‘yield trade’ has become crowded amongst a few blue chip stocks. Investors who search away from the crowd have the potential to find lesser-known companies selling on safe, maintainable, higher yields and with the potential for higher growth.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.