While some investors may settle for a slow-growing but high-yielding stock when they believe the dividend is maintainable and the balance sheet sound, ideally yield-seeking investors should also incorporate other important metrics such as a reasonable valuation and a growing stream of future earnings and dividends into their investment decision as well.
Here are three companies that, based on Morningstar’s forecasts, are currently trading on dividend yields of at least 6% and are forecast to grow their earnings and dividends over the next two financial years. Perhaps best of all, they don’t appear to be expensive.
1. Challenger Diversified Property Group (ASX: CDI) is a listed property trust that derives its earnings from rental income from its property investments. Its shares are trading at $2.47 and Morningstar is forecasting its earnings to rise from 20.7 cps in FY 2013 to 23.5 cps in FY 2015. Likewise Morningstar expects dividends to rise from 17.8 cps paid in FY 2013 to 19.3 cps in FY 2015. Based on next year’s dividend forecast of 18.5 cps, Challenger Diversified Property Group is selling on a dividend yield of 7.5%.
2. Crowe Horwath Australasia (ASX: CRH) was formerly known as WHK Group and is an amalgamation of a large number of accounting and financial planning practices. The company operates through a network of 80 offices across Australia, making it one of the largest providers of accounting, audit, tax, business and financial advice in Australia. With the share price trading around an all-time low of 57 cents and with Morningstar forecasting earnings per share (EPS) to grow from 4.6 cps in FY 2013 to 6.1 cps in FY 2015 and the dividend to fall slightly from 5 cps in FY 2013 to 4.9 cps in FY 2014 before rising to 5.2 cps in FY 2015, the stock is trading on a FY 2015 dividend yield of 8.6%.
3. Ardent Leisure (ASX: AAD) specialises in owning and operating leisure assets. These assets are spread across Australia, New Zealand and the USA and include Dreamworld on the Gold Coast, Goodlife fitness centres and AMF bowling centres. The stock is trading at $1.87 and Morningstar is forecasting it will grow its EPS from the current 13 cps to 14.6 cps in FY 2015 and correspondingly that the dividend will increase from the current 12 cps to 13.8 cps. Based on Morningstar’s FY 2014 forecast dividend of 12.8 cps, Ardent Leisure is trading on a dividend yield of 6.8%.
With the Reserve Bank of Australia setting the official cash rate at 2.5% and the inflation rate currently running at 2.4%, many investors earning 6% or greater dividend yields might be smiling. However we all know that interest rates won’t stay this low forever, which makes the selection of high yielding stocks that can still perform in a higher interest rate environment vitally important.
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Motley Fool contributor Tim McArthur owns shares in Crowe Horwath Australasia.