Many investors in the past few years have jumped aboard the so called "yield trade." This has essentially seen investors buy any blue chip stocks trading on dividend yields higher than a term deposit. Critics of this "yield trade" have raised concerns that investors have focussed far too heavily on the yield and not enough on potential risks of paying above fair value for these blue chips.
While the following companies are smaller businesses which can make them more exposed to shocks than their larger blue chip peers, their higher yields may be enough to compensate some investors for taking on higher risk.
Oakton (ASX: OKN) is an IT consulting firm that provides services to a number of industries including the utilities, healthcare and financial sectors. With a forecast dividend of just over 9 cents in the next 12 months, Oakton is currently trading on a dividend yield of 7.4%.
Dicker Data (ASX: DDR) is a large wholesale distributor of computer and IT related products. The company is a vendor for many of the main computer brands including Hewlett-Packard and Toshiba. The company operates on razor thin margins but also pays out most of its earnings. As one of the few companies which pays dividends quarterly, in the past 12 months Dicker Data has paid 6.25 cents per share in dividends, which places the stock on a historical dividend yield of 7.4%.
DWS (ASX: DWS) sits in the IT services sector alongside Oakton and offers software solutions to corporate and government agencies. The firm is forecast (by Morningstar) to pay dividends totalling 11.8 cents per share in the current financial year. At a share price of $1.61 this means DWS is potentially providing investors with a 7.3% dividend yield.
Wellcom (ASX: WLL) provides production and content management services to marketing agencies, advertising agencies and retailers. The company paid dividends totalling 18 cents per share in the past 12 months. Assuming this is maintainable over the next year, the stock is currently trading on a yield of 7%.
Foolish takeaway
The chase for yield has forced many stock prices higher and higher. As share prices go up, if earnings don't follow then naturally the stock is getting more risky, as the valuation is stretched. One way to avoid this risk, is to focus on finding companies that pay maintainable dividends and are also selling for a discount to (or at least no more than) a conservative determination of fair value.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
