The main risk of looking at dividend yields when considering investments is that the trailing dividend is not indicative of future prospects. Oftentimes a company with a large trailing dividend will cut its dividend; the market has it right. However, there is always the possibility that the market's pessimism is overblown.
Here are three companies with whopping dividends of over 9%, and reasonable long-term prospects.
1. Corum Group (ASX: COO)
Corum Group sells software to pharmacies. It has undergone a significant transformation in the last eight years. I would now consider an investment in Corum, because it generates significant cash flow and is debt-free.
Corum offers all the software a pharmacy needs, but is far from the dominant player in the industry. There is some risk that Corum will gradually lose customers over time. However, its pharmacy software is quite sticky, so it is very unlikely to lose customers quickly.
Corum's other software allows for payments over the internet. Customers include real estate agents, such as LJ Hooker, and local governments, who use the software to take electronic payments of rates and fines. As with the pharmacy software, the margins are high, allowing Corum to pay out much of its earnings in dividends. Corum has a trailing yield of 9.3% unfranked, at current prices. I don't think the dividend will be cut, although the company has announced its intention to increase spending on R&D.
2. Hunter Hall International (ASX: HHL)
Hunter Hall is fund manager that has fallen on (relatively) hard times. A single redemption of $95 million last year saw funds under management drop to just above $1 billion. The performance of the funds over the short term has not been particularly impressive, although the long-term record is satisfactory.
Because Hunter Hall specialises in international markets, their funds are likely to attract more investors if the Australian dollar falls in value. Perversely, fund inflows usually follow good performance. That doesn't work well for investors in the fund, but does mean that Hunter Hall shareholders will receive higher fees. The company has forecast lower profits in FY 2014, and a lower dividend is quite likely. However, I believe the cut will not be severe.
3. NRW Holdings (ASX: NWH)
I suggested readers consider NRW Holdings in this article when shares traded at about $1. According to my calculations at the time, a falling dividend was fully priced in, based on the conservative assumption of a final dividend of 4 cents. In the end, the final dividend was 5 cents. Having dropped as low as 85 cents, the share price rebounded to $1.60, before coming back to about $1.20. Although the company currently trades on a trailing yield of 9.3%, the dividend will almost certainly fall.
Foolish takeaway
High trailing dividend yields are common in the mining services industry at the moment because the share prices of companies have dropped to reflect reduced future earnings. Investors who want peace of mind should avoid mining and mining services stocks, in my opinion. Of the three companies mentioned here, I think Corum Group is a reasonable investment, although each of these companies is a bit too risky for me.
