With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) struggling to gain ground in the past month and concerns mounting that the market has reached lofty levels, many investors are hoping to ride out any future market jitters by owning high quality, dividend-payers.
It’s an understandable strategy but…
If the capital losses from your investments are greater than the dividends received, then unfortunately you’ll end up worse off no matter how attractive the dividend yields may appear. This situation becomes all the more dire if an investor has paid an excessive price for stocks which are well above fair value leading to not just a temporary capital loss but perhaps something much more permanent or long-term.
To reduce this risk to one’s wealth, when choosing high yield stocks it’s vitally important to determine not just the sustainability and outlook for the dividend but also to determine a conservative estimation of intrinsic value.
Here are three companies which are forecast to grow their earnings at a rate in excess of 5% which should help sustain their future dividends. Importantly, it could be argued that the share prices of these three companies are not expensive.
- Telstra Corporation Ltd (ASX: TLS): By financial year (FY) 2016, Telstra should be earning 36.4 cents per share (cps) and paying a fully franked dividend of 31.7 cps according to research provided by Morningstar. Based on these forecasts, the stock is trading on a forward price-to-earnings (PE) ratio and dividend yield of 16.7x and 5.2% respectively.
- CSR Limited (ASX: CSR): With earnings heavily exposed to the building construction cycle, CSR is currently in a sweet spot. Based on forecasts for EPS and dividends in FY 2016 of 30.4 cps and 21.8 cps respectively, the stock is priced on a forward PE of 13.1x, with a yield of 5.5%.
- Kathmandu Holdings Ltd (ASX: KMD): In FY 2016, Kathmandu is forecast to earn 14 cps and pay a dividend of 8 cps to shareholders. If the outdoor adventure retailer can hit those numbers, the stock is currently available on a forward PE and yield of 11.6x and 4.9% respectively.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.