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4 emerging companies with dividend yields over 5.5%

Much has been written recently about the ‘chase for yield’ including an article I wrote here. The point is that when considering an investment it is important for investors to view a company’s yield as just one component in the overall investment decision. For example if a stock is considered 10% overvalued and has a 5% dividend yield, assuming the stock fall 10% to fair value, an investor who collect the 5% worth of dividends will still make an overall loss due to the decline in value.

The above is premised on the risk associated with paying above a fair value, not the so-called ‘risk’ of short-term volatility in a share price. With that in mind, four companies investors may wish to investigate further as they could possess both a high dividend yield and a reasonable valuation are:

GUD Holdings (ASX: GUD), which owns a diverse range of branded products including the well-known Sunbeam small appliances brand. According to Morningstar, GUD will have earnings per share (EPS) of 51.6 cents and pay dividends of 48 cents per share (cps) in financial year (FY) 2014. This would provide a yield of 7.8% on a price-to-earnings (PE) multiple of 11.8.

IOOF (ASX: IFL) is a mid-tier wealth manager with significant funds under management. Based on Morningstar’s forecasts, IOOF will earn 52.5 cps in FY14 and pay a dividend of 45.9 cps. At IOOF’s current share price of $7.70 this would mean a dividend yield of 6% and a PE multiple of 14.7.

Programmed Maintenance Services (ASX: PRG) does have some exposure to the resource sector, however it also provide staffing, maintenance and project services to a number of other industries. With Morningstar forecasting EPS of 30.1 cps and dividends of 17 cps in FY14. At current prices, it could provide investors with a yield of 6.9% at a PE multiple of 8.1.

Adelaide Brighton (ASX: ABC) is one of Australia’s major suppliers of cement, lime and concrete products. Based on Morningstar’s forecast, EPS will be 25.7 cps and dividends will be 18 cps in FY14. If those forecasts prove correct, Adelaide Brighton is trading on a yield of 5.6% and a PE of 12.6 times.

Foolish takeaway

It is understandable that investors are searching for high dividend yields to replace the low interest received from bank accounts. It is vitally important though, that in this search for high-yielding stocks investors remember to not pay an inflated price above fair value for stocks..

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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