Are you an income investor? Does the idea of a 7% dividend turn you on much more than the 2% and 4% available from the likes of CSL Limited (ASX: CSL), and Amcor Limited (ASX: AMC)?
Welcome to the world of 7-percenters. Very occasionally, you'll be able to find a company with relatively few problems paying 7% or more per annum in dividends. Most of the time it's a trade-off, where you accept some problems and take a calculated gamble that they're not that serious. The following companies are diverse, but accurately reflect some of the issues when it comes to finding high-paying stocks.
Charter Hall Retail REIT (ASX: CQR) – yields 6.7% unfranked
Charter Hall is a relatively problem-free dividend stock. The company buys, sells, and manages retail rental assets, and aims to both turn a profit and generate income for shareholders. Charter Hall has a long track record of excellence in this space, has modest debt compared to most Real Estate Investment Trusts (REITs), and is valued at just a 10% premium to the value of its underlying assets. This compares positively to something like Westfield Corp Ltd (ASX: WFD) or Scentre Group (ASX: SCG) where buyers must pay a ~40% premium.
Charter Hall has a lot going for it, yet without the franking credits income investors could be served just as well by buying something with a smaller yield and full franking on the dividend.
Spotless Group Holdings Ltd (ASX: SPO) – yields 9%, franked to 30%
Investors in Spotless get a monster dividend, and the company is very cheap compared to the rest of the market. Yet it's cheap because of a well-publicised downgrade in December last year, the company's high debt load, and worries about recent acquisitions. Although management has stated that they'll try to reduce debt, they didn't have a lot of conviction and even stated that additional debt repayments would depend on the company's other demands for capital.
With a Price to Earnings (P/E) ratio of just 8 and a 9% dividend, Spotless does appear to be a potential value investment. Yet investors who buy it are taking a number of risks in return for the reward, and this isn't the kind of company I'd rely on for my retirement income.
Thorn Group Ltd (ASX: TGA) – yields 6.6% fully franked
Thorn Group has its own issues, with the potential for regulatory penalties over past misconduct as well as the chance that the current regulatory framework could tighten, affecting the company's business. Given that a fair amount of Thorn's leasing activities is to Centrelink recipients, readers can see the concerns. Thorn mitigates this by aiming to treat all customers with dignity and respect, as well as arguing that some have no way to buy essentials like a refrigerator without Thorn's services. True or not, if the market thought Thorn had a bright future ahead of it, you and I wouldn't be getting offered a 6.6% fully franked dividend.
Thorn has shown that it is still capable of growing its core business, including a greater amount of small-business lending, which is shaping up as an important growth avenue in the future. At 10 times earnings it's not expensive, although again investors should be aware of the risks.
