It can be tempting to buy shares that appear to offer huge dividend yields, but I think this is a strategy that is likely to end in disaster.
In most cases, the market is giving investors a warning that the current dividend is unsustainable and that a dividend cut isn’t too far away.
Instead of looking at the highest yielding shares, why not consider buying shares that offer slightly lower dividend yields, but have much stronger underlying business fundamentals and solid growth prospects.
For example, these three shares offer dividend yields of more than 4% and are well placed to deliver capital gains over the long term:
Mantra Group Ltd (ASX: MTR)
The Mantra share price has been in the doldrums lately but the company itself continues to perform quite strongly. The hotel operator has been a key beneficiary from the booming tourism sector, which continues to gather momentum thanks to the stunning growth of inbound tourists from Asia. Despite some market concerns, Mantra reaffirmed its FY17 guidance yesterday and is currently offering a fully-franked dividend yield of 4.1%
Vocus Group Ltd (ASX: VOC)
The Vocus share price has also been under pressure over the past few months as an increasing number of short sellers have circled around the telecommunications company. Despite this, the current risk-reward proposition looks appealing considering the company is still generating good levels of growth from its wholesale and retail divisions. Although the shares might be stuck in the dog house for a while longer yet, shareholders can still pick up a fully-franked dividend yield of around 4.2%.
Folkestone Education Trust (ASX: FET)
Folkestone is one of my preferred property investment options thanks to the favourable long-term outlook for the child care sector in Australia and New Zealand. The trust currently has 402 properties in its portfolio with an impressive occupancy rate of 99.5%. There is also a large pipeline of new developments under construction that should help to underpin earnings growth in the medium term. Folkestone has increased its distributions by around 9% per annum since 2011 and is currently yielding 5.1%.
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Motley Fool contributor Christopher Georges owns shares of MANTRA GRP FPO and Vocus Communications Limited. The Motley Fool Australia owns shares of Vocus Communications Limited. 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.