2 stocks with HUGE dividend yields on my watch list

Finding sustainably high-yielding assets in this era of low interest rates has been difficult. Some stocks may appear good initially, but turn out to be yield traps because a dividend cut is on the cards.

One example of that risk would be BHP Billiton Limited‘s (ASX: BHP) large dividend before it was cut because revenue dropped significantly.

There is another risk when buying very high-yielding stocks. Perhaps the business is paying out almost 100% of its profits, so when it wants to grow the business it might have to cut its dividend. There’s a possibility that Telstra Corporation Ltd (ASX: TLS) may cut its dividend .

Here are two stocks with huge yields that I think could be sustainable:

G8 Education Ltd (ASX: GEM)

G8 is Australia’s largest listed childcare centre business with a market capitalisation of $1.2 billion. It has rapidly expanded in recent years by acquiring a large number of childcare businesses. At 30 June 2016 it had 478 Australian childcare centres and 20 in Singapore. Management expect to settle a further 12 centres in the second half of the year to December 2016.

G8 has stuck to paying a fully franked dividend of $0.06 per share every quarter since January 2015. It’s paying out a large percentage of its cashflow, but not all of it. In the half year to 30 June 2016 its net cash from operating activities was $33.17 million, whereas its total dividends paid out was $30.85 million which is 93%.

You’d be right to think G8 Education’s dividend yield would be large as a result of this. It has a grossed up dividend yield of 10.71%. The yield alone is higher than the historic 10% average returns for shares. Analysts don’t expect the dividend to increase again until 2018, but that would provide a satisfactory return until then.

G8 is trading at 10.6x FY17’s estimated earnings (source: Commsec) which is low, but I don’t expect much growth in the medium term.

Cromwell Group (ASX: CMW)  

Cromwell Property Group is a manager of properties and property funds with a market capitalisation of $1.55 billion.

Cromwell has been viewed as a highly leveraged business for a few years now, but management is slowly lowering the gearing. In 2015 its gearing was 45%, in 2016 it was down to 43%. The dividend payout ratio in FY15 was 94%, this improved to 87% in FY16.

Even with decreasing leverage and a lower payout ratio, Cromwell managed to increase its distribution in FY16 by 4.3%. Cromwell has increased its dividend every year since FY12.

Management has disclosed that distributions will be at least 8.34 cents per share during FY17. That means Cromwell is trading with a forward yield of 9.37%.

Foolish takeaway

Sometimes overpaying for growth stocks can be a problem for investors. It’s also possible to overpay for dividend stocks. However, both Cromwell and G8 have shown they can at least maintain their payouts, with a chance of increasing dividends in the long term.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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