With term deposits so low, it's natural that investors should go looking for high-yielding dividend companies. With the scanner tools available with so many online brokers nowadays, it's easier than ever.
However, some stocks with big dividends can be very risky. Here's my take on these 3 companies:
Spark Infrastructure Group (ASX:SKI) – yields 6% unfranked
Spark is an electricity utility operating in Victoria and South Australia. Despite a challenging year in 2016, the company grew its dividend to 14.5 cents even though changes to regulated power prices saw company earnings fall.
As a regulated utility, Spark appears a low-growth investment although its dividends should prove reliable. There is the potential for greater government regulation or competition in South Australia, however.
Genworth Mortgage Insurance Australia (ASX:GMA) – yields 8% fully franked
Genworth has many of the characteristics I'd love to own in an insurer – lots of assets, a modest price, and a high dividend. However, Genworth is cheap because Australia's housing market is expensive and investors are wondering if the company will blow up when interest rates rise. Genworth writes Lenders Mortgage Insurance (LMI) on new higher-risk home loans, which means it wears the loss when borrowers default.
Given the recent trend for banks to take their LMI insurance in-house, and raise the minimum deposit required for loans (thus reducing the need for LMI), Genworth could also write less business in the next year or two – which means falling earnings. Cheap, yes, but cheap for a reason in my opinion – leave this one for the experts.
Sky Network Television Ltd (ASX:SKT)
Sky Networks faces some big challenges in its business, including the advent of streaming services and increasing competition. The company has reported mediocre results for the past 2 years, and the NZ Commerce Commission recently blocked the company's proposed merger with Vodafone, which knocked 20% off the share price. One thing I really like about Sky though is the way the CEO explains the business changes in his investor letters – this company must have the best informed shareholders on the market.
Although the business is facing challenges, Sky appears pretty switched on at dealing with them, and has grown its dividends over the past 5 years. Kind of like Telstra Corporation Ltd (ASX: TLS), which also faces structural challenges, I think Sky could make an interesting income investment today.
