Looking for a solid stock with a massive dividend yield? Me too – always. I love to buy stocks with huge yields, as long as the dividends are sustainable. That’s because dividend stocks provide a steady flow of cash for spending or investing elsewhere, thus reducing the need to trade. Commonly, companies with large dividend yields are facing some challenges and are out of favour with the market. However, the market often underestimates the ability of established companies to adapt. Here’s my list of income stocks that I think will yield at least 7% in the coming year (and beat the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in the long term).
1) DWS Limited (ASX: DWS) is an IT consulting company that specialises in project management (bringing in new IT systems), business analysis, content management systems, and boutique software development. There can be no doubt that the company is shrinking, but I think the market has underestimated the company’s ability to maintain profitability while downsizing. It boasts a trailing yield of 9% and a forecast yield of 7.4%, fully franked.
2) Pacific Brands Limited (ASX: PBG) owns various brands such as Sheridan and Bonds. Superinvestor Peter Lynch famously suggested investors invest in what they know, so I logged on to Bonds website to buy some purple Bonds boxer shorts as part of my research. The experience was fluid but the price was fairly high (for the boxers, not the stock). Having received the boxers some weeks ago I’m happy to report that the purchase was worth it and I would do it again. However, not all customers are equally satisfied. This comment on Bonds’ Facebook page sums up the major risk nicely: “I’ve noticed a lot of comments about Bonds quality going downhill lately. I’ve been a regular customer of yours for babywear over the last two years and sadly I have to agree.” However, if you’re confident Bonds is maintaining quality (and its brand) since moving manufacturing overseas, then the trailing yield of 9.2% and the forecast yield of 7.4% must be attractive.
3) Finally, Wotif.com Holdings Limited (ASX: WTF), owner of the eponymous hotel booking website, is also looking good with a trailing yield of 9.8% and a forecast yield of 8.2%. The company is slowly losing out to competition from Webjet Limited (ASX: WEB) and newer competitors such as AirBnB. Nonetheless, the brand remains trusted and sales are likely to pick up in line with the tourism sector if the Australian dollar does weaken. The website ranking service Alexa shows the company has slipped to 191 since I covered it at greater length in this article.
These stocks have massive dividends but some notable risks. I'm much keener on this growing dividend stock...
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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.