4 oversold stocks yielding over 7%

These four stocks are out of favour, offering investors a chance to buy a steady income stream for an attractive price.

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Without a doubt, Australian investors love to buy stocks that pay a decent dividend stream. This is partly because the income is particularly useful for self-managed superannuation funds, and partly because Australia has a franking credit system that incentivises companies to pay out free cashflow to investors. The trick is to make sure that the dividend is likely to be sustained. Here’s a list of four solid dividend stocks that definitely deserve a spot on your watchlist (if not in your portfolio).

Pacific Brands Limited (ASX: PBG) is a company that owns a bunch of established clothing and apparel brands. The company has suffered from the changing retail environment, in particular, the move towards in-house brands (such as Bonds and Berlei). The market is arguably too pessimistic about the company, pricing it for continuous decline. Accounting for a reducing dividend, the company will yield almost 10% this year, dropping to 8% in FY2015 at the current price of 50.5c. As with all the forecasts in this article, I’m using the Thompson Consensus Estimates, which may be wrong, but are usually reasonable.

Typically, the highest dividends are found in companies that are facing a decline in profits, leading to market participants losing interest. Data#3 Limited (ASX: DTL) definitely fits that description. The company installs software and hardware systems as well as providing various ongoing support services. The market is pricing the business for decline, which in my view is correct, as the rise of data centres makes on-site hardware far less important. Having said that, the company seems highly likely to yield over 7% this year. An important new cloud-computing contract means that this dividend may even increase in the coming years. It’s good to see the recent on market purchase of shares by a director.

DWS Ltd (ASX: DWS) is in the same IT consulting field as Data#3, and is similarly out of favour. While the company doesn’t boast a history of share price appreciation, it has paid a very regular dividend. Forecasts indicate the company should pay over 7.5% this year, with the likelihood of an increase in FY 2015. The general rule of thumb is that IT spend is somewhat cyclical, with budgets decreasing in the lead up to an election. If that holds true, DWS is trading at a good price.

Wotif.com Holdings Limited (ASX: WTF) owns the eponymous website: if you’ve not heard of it, you’re in the minority! While the company does own the number-one hotel-booking site, it has been sold down because it is no longer growing. This is as a result of competition from many angles, including Airbnb, which has the potential to disrupt the entire hotel industry. Having said that, the company is predicted to pay a fully franked dividend of about 7.5% this year, rising to above 8.5% in FY 2015.

Foolish takeaway

I’m more comfortable investing in companies with secular tailwinds such as cloud computing and the ageing population. However, the market usually recognises these trends and prices companies accordingly. Indeed, each of the high-yielding companies in this article is out of favour with the market precisely because their long-term prospects are not particularly bright. In my opinion, the market may well be overreacting.

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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article. He welcomes feedback from readers.

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