One (of many) issues investors face when appraising a company based on its dividend yield is determining whether the company will be able to maintain its dividend. This issue isn't as pressing amongst many blue chip stocks, for example Telstra (ASX: TLS), where the defensive nature of its earnings stream provides the capacity to maintain and perhaps even boost its 28 cent dividend.
However for investors who wander outside of the blue chip stocks in search of higher yields, the issue of dividend maintainability becomes much more important and often more difficult to determine. For example a glance through the share tables will immediately identify a number of mining service companies with mouth-watering yields, such as Fleetwood (ASX: FWD), which is stated to have a dividend yield of 17%. For readers thinking that sounds too good to be true – you're right, it probably is!
The published yield is based on previous dividends paid, not on what will be or what is expected to be paid in the future. In Fleetwood's case, this is a classic example of the market expecting a reduction in earnings and likewise a cut in the dividend paid. This has led to the market marking down the share price in anticipation – which consequently has driven up the historic yield.
While the mining services sector is certainly a minefield at present, the following companies look to have a reasonable chance of maintaining their dividends and are trading on attractive yields.
Tamawood (ASX: TWD) is a small Queensland-based property developer. The company recently updated the market stating it was aiming for its next two dividends to be consistent with the last two. That places Tamawood on a forecast dividend yield of 7.7%.
Department store Myer (ASX: MYR) is currently trading on a yield of 7.6%. The most recent interim dividend was maintained at the same rate as the prior corresponding period. Given Myer's third-quarter sales update saw a small rise in sales, there is reasonable evidence to expect a 9 cent final dividend, which would be consistent with last year.
Scott Corporation (ASX: SCC) is a provider of bulk and special materials transport and logistics. Earlier this year the company won a couple of important contracts and also made an acquisition. Profits improved at the half year and the board increased the interim dividend. With guidance from management that Scott Corp's earnings in the second half should at least equal first-half profits, the potential for the current full-year dividend of 2.5 cents per share to be maintained looks achievable and places the stock on a fully franked yield of 6%.
Foolish takeaway
High yielding stocks are an important segment of many portfolios. As the market moves higher and many yields shrink, investors will undoubtedly start searching further afield for opportunities. With the domestic economic outlook quite soft, many companies may be forced to reduce their dividends which makes identifying companies with maintainable dividends all the more critical.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
