The Motley Fool

A cheap small cap with a huge dividend yield

Airlines are terrible businesses, and don’t let anyone tell you otherwise. Just take a gander at Virgin Australia’s (ASX: VAH) ugly full year result.

But there are exceptions to every rule, and opportunistic small cap investors will do themselves a disservice if they overlook Regional Express (ASX: REX). This independent carrier is being buffeted by the same winds as Virgin Australia – consumer confidence and the carbon tax not least among them – but is a far better bet.

For one, because Regional Express flies domestic routes that don’t experience much competition, its core business is far more stable.

For two, the share price is extremely cheap, at just 6 times earnings. It’s true the company’s full year profits are expected to be as much as 40% lower than the year prior, but the market isn’t seeing how this conservatively run airline group has weathered greater storms. In short, the current share price poses an opportunity.

As an example, REX shares have outperformed the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) over the last 5 years, and over the last 10 years as well, a claim which neither Virgin Australia or Qantas (ASX: QAN) can rightfully make.

Finally, the current dividend yield is over 7%, fully franked, and this payout looks to be sustainable despite this year’s expected profit fall. All told, that’s why this cheap small cap falls firmly into ‘take a punt, see how you go’ territory, especially in the context of a diversified portfolio. Patient, long-term investors will want to pay close attention.

Looking for even more promising investment ideas? If you love fully franked dividends, then grab your FREE copy of this valuable investment report, “The Motley Fool’s Top Dividend Stock for 2013-2014.” You’ll discover The Motley Fool’s favourite income idea for 2013-2014! Just click here to claim your FREE copy.

More reading

Motley Fool writer/analyst Catherine Baab-Muguira owns no shares in any company mentioned in this article.

5 ASX Stocks for Building Wealth After 50

I just read that Warren Buffett, the world’s best investor, made over 99% of his massive fortune after his 50th birthday.

It just goes to show you… it’s never too late to start securing your financial future.

And Motley Fool Chief Investment Advisor Scott Phillips just released a brand-new report that reveals five of our favourite ASX stocks for building wealth after 50.

– Each company boasts strong growth prospects over the next 3 to 5 years…

– Most importantly each pays a generous dividend, fully franked.

Simply click here to find out how you can claim your FREE copy of “5 ASX Stocks for Building Wealth After 50.”

See the stocks now