Which of these 2 high-yield stocks should you own?

Suncorp Group Limited (ASX:SUN) and Seven Group Holdings Ltd (ASX:SVW) both have high yields, but one has stronger growth prospects.

| More on:

Would a high-yield stock be as attractive if the company wasn’t showing strong growth?

Finding stable dividend-paying stocks is a key part of long-term investing success. Of course, we’d all like high yields, but the trick to having exceptional compounding portfolio income is a growing dividend.

If a company raises its full dividend an average 7.5% annually, for example, the dividend could double every 10 years or so. That’s the kind of income growth you want to see. The increased dividends can be reinvested and you could compound your returns more.

Most companies regularly pay a certain portion of their earnings out as dividends, so it pays to have stocks with solid earnings growth. One way to see if earnings growth is matched well with a stock’s price is to use the price-earnings to growth (PEG) ratio.

If the PE of a stock is higher than its earnings growth rate, the ratio is above one. If it is two times more, then the share price may be marked up too much. If the growth rate is about the same as the PE, you may have a reasonably priced stock.

Here are two companies that have high yields. One of them I would consider a better buy than the other, even though both have PEGs under one.

Seven Group Holdings Ltd (ASX: SVW)

This diversified investment and operating company has holdings in Seven Network and other print and digital media. In addition, it has the Caterpillar heavy vehicle and equipment business which supplies mining and construction companies, as well as providing repair and maintenance services.

The mining pullback has weakened new equipment demand, but the company is looking towards servicing the vehicles bought previously which will be coming up for maintenance. It is also providing automated vehicles to mining majors like Rio Tinto Limited (ASX: RIO) to reduce workforce costs.

The company is also expanding into the growing oil and gas industry to offset sagging mining-related business demand. The stock offers a big 5.4% yield fully franked and its PEG ratio is less than one. The PEG is probably that low because both the media and mining industries are not strong currently and the market is pricing the stock lowly on lower earnings growth expectations.

Suncorp Group Limited (ASX: SUN)

The general insurer has been turning its business around over the past two years. It is implementing a simplification program over the next several years that is projected to save as much as $265 million annually by 2016.

Its banking segment has improved over the past year and is benefiting from the increase in home loans brought on by the rising housing market and low interest rates. The company reported a wide increase in full-year net profit and raised its full-year dividend by 40% thanks to a special dividend.

Even though the stock hit a multi-year high last month, the dividend yield is still a hefty 5.7% fully franked which beats the yields of all the big four banks. The PEG ratio is at 0.59. This possibly indicates the market may not be sufficiently pricing in the forecast earnings growth until it actually sees more of that growth realised over the next year.

It can take time to find well-balanced stocks, but it isn’t impossible. One more company that could be a good dividend and growth candidate is a smaller stock with impressive results recently.

Combined with a reliable growth record and attractive earnings potential, this small-cap stock was dubbed The Motley Fool‘s Top Stock of 2014-2015.

Our top analyst team has written a free report which they’re sharing with all interested investors.

If this is you, simply click on the link below and enter your email address – it takes less than 30 seconds – and we’ll send it to you, completely FREE!

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »