The dividend boom of 2013 saw the rise of the blue chip dividend-paying stocks such as the big banks, as investors favoured dividend yields over bank deposit rates. Of course, unlike bank deposits, share prices can go down, effectively wiping out income received as dividends. For that reason, it is understandable that investors choose companies they perceive as safe.
However, after a solid run it seems unlikely that dividend stocks like the banks will rise much more, as they are some of the most expensive in the world on most metrics. Here are seven high-yielding stocks that will pay a solid income stream and, in my view, will also see share price appreciation on the balance of probabilities.
The first stock on this list is hotel and flight booking website Wotif.com Holdings Limited (ASX: WTF). Wotif is trading on a trailing yield of 8.6% fully franked, although in FY 2013 it had a 96% payout ratio, so it could barely afford the dividend. The company is no longer growing, as intense competition from new websites such as Air Bnb and Skyscanner undermine its appeal. However, the company has extremely high brand recognition and even if revenues are in decline, I’m of the opinion that the decline will be a slow one. As a result, I believe the company has the ability to pay dividends in excess of 7% (at current prices) for many years to come.
The only mining services stock I’ve written about positively is NRW Holdings (ASX: NWH). You won’t catch me buying mining related stocks, but I do think NRW Holdings is the baby thrown out with the bathwater. I suggested it was a buy at $1 and although it now trades at $1.34, it still has a fully franked dividend of 8.4%. Although profits are likely to decline, NRW should be able to get through the end of the mining boom because most of its projects are related to production, rather than Greenfield development. To minimise risk, potential investors should wait until some bad news is released and buy shares on a dip.
A far safer option for yield seekers would be Australian Leaders Fund (ASX: ALF). The fund is essentially a publicly traded hedge fund with a trailing yield of 7.1%. It trades at above net tangible assets, indicating that the market is willing to pay a premium for (expected) superior investment management. Personally, I like the fund because it is setting itself up to profit from the ageing population, but I don’t invest in managed funds as a general rule.
One high-yielding company that investors are likely to know well is Oroton Group Limited (ASX: ORL). The company paid 50c in dividends in FY2013 and trades on a trailing yield of 9.1% at current prices. However, don’t be caught out by this manoeuvre; this dividend represented an unsustainable payout ratio of 287% of underlying earnings. This state of affairs has been brought about by the loss of the Ralph Lauren brand in Australia. There is good reason to believe the company will grow earnings going forward, as it has just made investments in Gap and Brooks Brothers and expanded the Oroton brand to Hong Kong and China. However, the dividend is likely to be drastically cut. I’ve included Oroton in this list because it is attractive at current prices, but the company does demonstrate that investors should be wary about trailing dividend yields: it’s the future that counts most.
My favourite company on this list boasts a more sustainable dividend, also over 9%. Gale Pacific Limited (ASX: GAP) manufactures and distributes shading materials and other home improvement products. Gale boasts a P/E ratio of under 10, brings in foreign revenue, has manageable debt, and, I believe, will continue to experience demand for its products. Low Return On Investment (ROI) businesses like Gale can easily lose money if they make poor acquisitions or take on too much debt. I’d call Gale a strong buy for the dividend at 25c or below, but even at current prices it boasts a partially franked dividend yield of 9.3%.
One way to secure a strong income stream is to buy a solid company when the market has turned against it. Such an opportunity has arisen with Metcash Limited (ASX: MTS), which yields 8% fully franked at current prices. Metcash is a distribution company that supplies independent supermarkets and liquor stores, competing directly with the well-known supermarket duopoly. Earnings went backwards in FY 2013, sending the share price tumbling; it cannot be denied that significant risks remain, as the introduction of new competitors such as Aldi has made the supermarket space increasingly competitive. I’m not willing to buy shares yet, but I believe the dividend would only be cut by a small amount, if at all.
Trading at a trailing P/E of just 5 and paying a fully franked dividend yield of 7.4%, toy company Funtastic Limited (ASX: FUN) certainly has its attractions. However, the company only turned itself around in FY 2012, having made a loss in the prior years. Significant dilution in recent years has hurt shareholders and one of the directors sold $150,000 worth of shares in January. Personally, I’d avoid this stock, but I have to admit the metrics look attractive.
All the high-yielding stocks mentioned above are likely to pay strong dividends and will probably beat the market. Of these, I’d only consider buying Wotif or Gale Pacific, because I think there is a substantial chance of capital gains with these stocks. As a mater of principle I much prefer to buy shares in discounted companies with growing dividends. Such companies may yield less income today, but they are likely to outperform the high-yielding companies on the list above over the long term. It’s often worth accepting a slightly lower yield, if the business is high quality.
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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.