Morgans says buy this small-cap stock on a 10% dividend yield

There is a small cap stock that appears to have a sustainable dividend yield of over 10%, according to Morgans. Income seeking investors will need to read this article.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The market may be more focused on growth than income stocks as interest rates have bottomed and are likely to rise next year. But there's a small cap stock on a fat dividend that is hard to ignore, according to Morgans.

The stock is residential property developer Villa World Ltd (ASX: VLW), which has recently announced two project transactions that will give the company a nice return.

The first is the sale of the Donnybrook joint venture project for circa $100 million. Villa World owns 51% of the JV and will book a gross profit of around $52 million.

Villa World will start receiving the proceeds in stages between FY20 and FY23, which underpins Morgans' 18% earnings growth forecast for the company from that year.

What's significant is that the proceeds will help offset any weakness in the housing market as there are signs that the domestic residential market has peaked and could be in for a period of softness, if not decline.

The second transaction is the part sale of its Wollert project to Ho Bee Land, which will add around $5.2 million to Villa World's net profit in the first half of 2018.

Villa World will retain a 51% control of the Wollert project, which includes 285 land lots, and will receive fees for development management, sales and marketing and the potential for performance fees, added the broker.

"In our view, the sale of Donnybrook helps de-risk any impact from a weaker residential market (from FY20 onwards) and adds to the sustainability of the dividend in the medium term," said Morgans, which has an "add" recommendation on the stock with a price target of $2.96.

"In the short term, Villa World has upgraded 1H18 NPAT guidance to A$17-18m (from A$10-12m), predominantly due to the Wollert JV contribution."

Villa World is expected to pay a 19 cents a share dividend in FY18, which goes up to 20 cents in the following year. This puts the stock on a yield of around 10.4% for FY19 if franking credits are included.

That contrasts well with the more traditional high dividend paying stocks that includes the likes of Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA), Transurban Group (ASX: TCL) and APA Group (ASX: APA).

I am not suggesting that you should sell the large cap high yielders for Villa World, but you should have a good mix of large and smaller cap stocks in different sectors with sustainable dividend streams in your income portfolio. This will help mitigate the risk of picking a "yield trap".

If you are looking for other dividend ideas, click on the link below to get your free report from the experts at the Motely Fool who have uncovered a dividend gem to add to your watch list for 2018.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Transurban Group. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »