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.
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