3 stocks with 7% dividend yields

Investors sometimes fall into the trap of being enticed to buy a stock on a high trailing dividend yield without giving due attention to the outlook for future dividends. One way investors can think about future earnings and dividends is to look at analyst consensus forecasts.

1. Metcash (ASX: MTS) has found itself in a tough position as the wholesaler to IGA supermarkets. With Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) battling it out to win over customers with lower prices and better service it has put a squeeze on many independent operators including many of the clients which Metcash serves.

This situation is expected to lead to a decline in earnings at Metcash in both financial year (FY) 2014 and FY 2015. However with the share price trading near multi-year lows much of the bad news could already be reflected in the share price. While Thomson Consensus Estimates forecast the dividend to decline from 28 cents per share (cps) to 24 cps this financial year that still leaves the stock trading on a forecast dividend yield of 7.6%.

2. Pacific Brands (ASX: PBG) is a wholesaler and retailer of many well-known apparel brands including Bonds, Hard Yakka and Berlei. The company has been doing it tough in the face of weak consumer sentiment but has continued to streamline its operations and reduce costs to adapt to the changing industry dynamics.

With earnings likely to remain under pressure, the dividend is forecast by Thomson Consensus Estimates to remain essentially flat over the next few years. With the shares selling for 68 cents and with a forecast dividend in FY 2014 of 4.8 cps, Pacific Brands is trading on a forecast dividend yield of 7%.

3. WDS (ASX: WDS) is a mining services stock that largely flies under the radar whilst providing speciality services to the underground coal mining industry and the infrastructure, oil, gas and water pipeline construction and maintenance sectors in Australia.

Unlike most of its sector peers, which have seen their share price thrashed over the past 12 months, WDS’s share price is trading near its 52-week high. Thomson Consensus Estimates show a forecast dividend payout in FY 2014 of 6 cps which places the stock on a forecast dividend yield of 7%.

Foolish takeaway

Consensus earnings should of course not be taken as gospel and also need to be reviewed as they are subject to change. However they can be useful at providing a yard stick for investors to measure their own analysis against.

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Motley Fool contributor Tim McArthur owns shares in Pacific Brands.

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